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Fiscal Stability of High-Debt Nations under Volatile Economic Conditions

  • Robert E. Hall

Using a recursive empirical model of the real interest rate, GDP growth, and the primary government deficit in the U.S., I solve for the ergodic distribution of the debt/GDP ratio. If such a distribution exists, the government is satisfying its intertemporal budget constraint. One key finding is that historical fiscal policy would bring the current high debt ratio back to its normal level of 0.35 over the coming decade. Forecasts of continuing increases in the ratio over the decade make the implicit assumption that fiscal policy has shifted dramatically. In the variant of the model that matches the forecast, the government would not satisfy its intertemporal budget constraint if the policy was permanent. The willingness of investors to hold U.S. government debt implies a belief that the high-deficit policy is transitory.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18797.

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Date of creation: Feb 2013
Date of revision:
Publication status: published as Robert E. Hall, 2014. "Fiscal Stability of High-Debt Nations under Volatile Economic Conditions," German Economic Review, Verein für Socialpolitik, vol. 15(1), pages 4-22, 02.
Handle: RePEc:nbr:nberwo:18797
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  1. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  2. Bohn, H., 1990. "The Sutainability Of Budget Deficits In A Stochastic Economy," Weiss Center Working Papers 6-90, Wharton School - Weiss Center for International Financial Research.
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