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Deficits and Real Interest Rates in the United States: A Note on the Barro Theory versus the Cuckierman-Meltzer Theory of Government Debt and Deficits in a Neo-Ricardian Framework

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The theory of « Ricardian Equivalence » as presented by Barro (1974) argues that government budget deficits exercise no impact on the rate of interest in an economy. By contrast, Cukierman and Meltzer (1989) argue that, under very reasonable circumstances, deficits will in fact raise real interest rates. The present paper empirically examines the validity of these two opposing views within the context of an open IS-LM system, using quarterly data for the United States over the period 1960-1985. Estimating by Instrumental Variables and in first differences, this study finds very strong empirical evidence that deficits do raise real interest rates. This evidence strongly supports the Cukierman-Meltzer arguments.

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  • Cebula, Richard J. & Belton, Willie G., 1992. "Deficits and Real Interest Rates in the United States: A Note on the Barro Theory versus the Cuckierman-Meltzer Theory of Government Debt and Deficits in a Neo-Ricardian Framework," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 45(3-4), pages 289-295.
    • Handle: RePEc:ris:ecoint:0450
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    Cited by:

    1. Muhammad Ahad & Zaheer Anwer, 2021. "Asymmetric impact of oil price on trade balance in BRICS countries: Multiplier dynamic analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2177-2197, April.
    2. Liurong Pan & Asad Amin & Nian Zhu & Abbas Ali Chandio & Eric Yaw Naminse & Aadil Hameed Shah, 2022. "Exploring the Asymmetrical Influence of Economic Growth, Oil Price, Consumer Price Index and Industrial Production on the Trade Deficit in China," Sustainability, MDPI, vol. 14(23), pages 1-22, November.

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