Debt and Economic Activity in the United States
This paper documents a long-standing stability in the relationship between outstanding debt and economic activity in the United States, and explores the implications for capital formation of several hypotheses that could explain this observed phenomenon. The aggregate of outstanding credit liabilities of all nonfinancial borrowers in the United States bears as close a relationship to U.S. non- financial economic activity as do the more familiar asset aggregates like the money stock (however measured) or the monetary base. This stability in the debt-to-income relationship reflects the net outcome of pronounced but offsetting movements of the public and private components of the total debt aggregate. Three different hypotheses provide potential explanations for this phenomenon. Two of these, one emphasizing taxpayers' actions and one based on credit market borrowing constraints, carry the implication that increases in government debt outstanding associated with financing budget deficits crowd out private financing and hence private capital formation. The third hypothesis, which emphasizes the portfolio preferences of lenders, implies that increased government financing will not crowd out private capital formation but will cause the private sector to shift from debt to equity financing.
|Date of creation:||Jun 1981|
|Date of revision:|
|Publication status:||published as Friedman, Benjamin M. "Debt and Economic Activity in the United States." The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, edited by Benjamin M. Friedman, pp. 91-110. Chicago: University of Chicago Press, 1982.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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- Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers 48, Federal Reserve Bank of Minneapolis.
- Stephen M. Goldfeld & Alan S. Blinder, 1972. "Some Implications of Endogenous Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(3), pages 585-644.
- David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-49, Part I, M.
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