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
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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Volume (Year): 45 (1992)
Issue (Month): 3-4 ()
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