Possible Macroeconomic Consequences of Large Future Federal Government Deficits
This paper uses a macroeconometric model of the U.S. economy to analyze possible macroeconomic consequences of the large future federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. The results are bleak. Assuming no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. These estimates are in line with other estimates. If the dollar depreciates in response to the deficits, 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 deficit problem. If in addition U.S. stock prices fall, this makes matters worse by lowering output. Large personal tax increases or transfer payment decreases solve the deficit problem, but at a cost of considerable lost output over a 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:||01 Sep 2009|
|Date of revision:|
|Contact details of provider:|| Web page: http://icf.som.yale.edu/|
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- Ray Fair, 2009. "Analyzing Macroeconomic Forecastability," Yale School of Management Working Papers amz2443, Yale School of Management, revised 01 Oct 2009.
- Jordi Galí & 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 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.
- Ray Fair, 2009. "Has Macro Progressed?," Yale School of Management Working Papers amz2409, Yale School of Management.
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