TITLE

The Economic Consequences of Federal Deficits: An Examination of the Net Wealth and Instability Issues

AUTHOR(S)
Barth, James R.; Iden, George R.; Russek, Frank S.
PUB. DATE
July 1986
SOURCE
Southern Economic Journal;Jul86, Vol. 53 Issue 1, p27
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
In this paper, we have tried to clarify the controversy over federal deficits by bringing together different strands of the literature, and by examining historical data on interest rates, growth rates, and federal deficits. As we have shown, part of the literature discusses the net wealth status of federal debt in the context of a growth-interest rate condition, while another part discusses the potential explosiveness of federal debt when the interest rate exceeds the growth rate and there are permanent primary deficits. We have reviewed why the assumption that i exceeds g is important for both issues. This assumption can be justified by reference to steady-state optimal growth models, but as we indicated it is certainly not necessary in all growth models. Moreover, the historical data we presented for the U.S. suggest that the condition that g exceeds i has been more likely than the condition that i exceeds g. Thus, one may conclude that a key assumption underlying the debt-neutrality theorem and related propositions seems questionable. However, accounting for this condition does not seem to provide much additional insight about debt neutrality based on a re-examination of several tests employing consumption functions. Thus, more work regarding the appropriate measurement of variables as well as the appropriate way to empirically test propositions based on steady-state conditions is clearly warranted.
ACCESSION #
4631305

 

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