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Fiscal deficits, economic growth and government debt in the USA


  • Lance Taylor
  • Christian R. Proaño
  • Laura de Carvalho
  • Nelson Barbosa


A simple model illustrates interactions between the 'primary' fiscal deficit (total deficit minus interest payments), economic growth and debt. The deficit/income ratio responds countercyclically to growth while growth may respond positively (a 'Keynes' case) or negatively (à la 'Merkel') to the deficit. The recent Great Recession in the USA was atypical in that there was a weak countercyclical fiscal response. The increase in government net borrowing was significantly less than the decrease in private borrowing--an historically unprecedented asymmetry. Econometric estimates verify the historical pattern and further suggest that there is a strong positive effect on growth of a higher primary deficit, even when possible increases in the interest rate are taken into account. Copyright The Author 2012. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Suggested Citation

  • Lance Taylor & Christian R. Proaño & Laura de Carvalho & Nelson Barbosa, 2012. "Fiscal deficits, economic growth and government debt in the USA," Cambridge Journal of Economics, Oxford University Press, vol. 36(1), pages 189-204.
  • Handle: RePEc:oup:cambje:v:36:y:2012:i:1:p:189-204

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    References listed on IDEAS

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    Cited by:

    1. Christian R. Proaño & Christian Schoder & Willi Semmler, 2013. "Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Nonlinear Dynamic Panels," Working Papers 1304, New School for Social Research, Department of Economics.
    2. repec:exl:25engi:v:27:y:2016:i:2:p:134-143 is not listed on IDEAS
    3. Marcello Spanò, 2012. "A survey of the theoretical models of corporate hedging," Economics and Quantitative Methods qf1204, Department of Economics, University of Insubria.
    4. Halkos, George & Paizanos, Epameinondas, 2015. "Fiscal policy and economic performance: A review of the theoretical and empirical literature," MPRA Paper 67737, University Library of Munich, Germany.
    5. repec:gam:jecomi:v:5:y:2017:i:4:p:37-:d:113921 is not listed on IDEAS
    6. Alberto Botta, 2014. "Conflicting claims in the eurozone? Austerity's myopia and the need for a European Federal Union in a post-Keynesian eurozone center–periphery model," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(1), pages 45-70, January.
    7. Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 17-37.
    8. Alberto Botta, 2012. "Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the need of a European federal union in a post-Keynesian Eurozone CenterPeriphery Model," Economics and Quantitative Methods qf1203, Department of Economics, University of Insubria.
    9. Romero, Hector & Fajardo, Eddy Johanna, 2013. "Notas sobre la sostenibilidad de la deuda pública en Venezuela
      [Some considerations on debt sustainability in Venezuela]
      ," MPRA Paper 69671, University Library of Munich, Germany, revised 2013.
    10. Timothy P. Sharpe, 2013. "Institutional arrangements and public debt threshold limits," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(6), pages 707-728, November.
    11. Christian Schoder, 2016. "Estimating Keynesian models of business fluctuations using Bayesian Maximum Likelihood," IMK Working Paper 162-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    12. repec:nov:artigo:v:25:y:2015:i:spe:p:835-861 is not listed on IDEAS

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