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Economic Effects of Sustained Budget Deficits

Gale, William G. and Orszag, Peter R.

Abstract:

The effects of fiscal policy on the economy have received substantial attention in academic and policy circles. We review this literature in light of recent policy debates and new research and obtain three results. First, other things equal, deficits reduce national saving and future national income, even if international capital inflows avert an increase in interest rates. Second, the recent fiscal deterioration implies significant declines in future national income. Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long-term bond yields, controlling for other factors.

Citation

Gale, William G. and Orszag, Peter R. (2003), Economic Effects of Sustained Budget Deficits, National Tax Journal, 56:3, pp. 463-85

DOI: dx.doi.org/10.17310/ntj.2003.3.03