Possible Macroeconomic Consequences of Large Future Federal Government Deficits
This paper uses a multicountry macroeconometric model to analyze possible macroeconomic consequences of large future U.S. federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. In the baseline run, which assumes no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. The estimates from this run are in line with other estimates. Various experiments off the baseline run are then done. If the dollar depreciates, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that the United States can inflate its way out of its debt problem. If U.S. stock prices fall, this makes matters worse since output is lower because of a negative wealth effect. Personal tax increases or transfer payment decreases of three percent of nominal GDP solve the debt problem, at a cost of a real output loss of about 1.6 percent over the next decade. The Fed's ability to offset these losses is modest according to the model. Introducing a national sales tax is more contractionary than is increasing personal income taxes or decreasing transfer payments.
|Date of creation:||Sep 2009|
|Date of revision:||Feb 2010|
|Publication status:||Published in Jeffrey Brown (ed.), Tax Policy and the Economy, Vol. 25, University of Chicago Press, 2010, Ch. 4|
|Contact details of provider:|| Postal: |
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ray C. Fair, 2009. "Analyzing Macroeconomic Forecastability," Cowles Foundation Discussion Papers 1706, Cowles Foundation for Research in Economics, Yale University, revised Aug 2010.
- Ray C. Fair, 2009. "Has Macro Progressed?," Cowles Foundation Discussion Papers 1728, Cowles Foundation for Research in Economics, Yale University, revised Jul 2010.
- Fair, Ray C., 2008.
"Testing price equations,"
European Economic Review,
Elsevier, vol. 52(8), pages 1424-1437, November.
- Jordi Gal� & Mark Gertler, 2007.
"Macroeconomic Modeling for Monetary Policy Evaluation,"
Journal of Economic Perspectives,
American Economic Association, vol. 21(4), pages 25-46, Fall.
- Jordi Galí & Mark Gertler, 2007. "Macroeconomic modeling for monetary policy evaluation," Economics Working Papers 1039, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2007.
- Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," NBER Working Papers 13542, National Bureau of Economic Research, Inc.
- Ray Fair, 2009. "Analyzing Macroeconomic Forecastability," Yale School of Management Working Papers amz2443, Yale School of Management, revised 01 Oct 2009.
- Ray C. Fair, 2001.
"Estimates of the Effectiveness of Monetary Policy,"
Cowles Foundation Discussion Papers
1298, Cowles Foundation for Research in Economics, Yale University, revised Jun 2003.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1727. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames)
If references are entirely missing, you can add them using this form.