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Economic Effects of Sustained Budget Deficits


  • Gale, William G.
  • Orszag, Peter R.


The effects of fiscal policy on the economy have received substantial attention in academic and policy circles. We review this literature in light of recent policy debates and new research and obtain three results. First, other things equal, deficits reduce national saving and future national income, even if international capital inflows avert an increase in interest rates. Second, the recent fiscal deterioration implies significant declines in future national income. Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long-term bond yields, controlling for other factors.

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  • Gale, William G. & Orszag, Peter R., 2003. "Economic Effects of Sustained Budget Deficits," National Tax Journal, National Tax Association, vol. 56(3), pages 463-485, September.
  • Handle: RePEc:ntj:journl:v:56:y:2003:i:3:p:463-85

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    References listed on IDEAS

    1. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters,in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
    2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    3. Stanley Fischer & Julio J. Rotemberg, 1994. "Editorial in "NBER Macroeconomics Annual 1994, Volume 9"," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 1-8 National Bureau of Economic Research, Inc.
    4. Douglas W. Elmendorf & Jeffrey B. Liebman, 2000. "Social Security Reform and National Saving in an Era of Budget Surpluses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 1-72.
    5. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(4), pages 675-697, December.
    6. Stanley Fischer & Julio J. Rotemberg, 1994. "NBER Macroeconomics Annual 1994, Volume 9," NBER Books, National Bureau of Economic Research, Inc, number fisc94-1, January.
    7. Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
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