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

Barth, James R.; Iden, George R.; Russek, Frank S.
July 1986
Southern Economic Journal;Jul86, Vol. 53 Issue 1, p27
Academic Journal
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.


Related Articles

  • Federal Deficit Effects on Short and Long Term Rates: A Note on Hoelscher. Goff, Brian L. // Southern Economic Journal;Jul90, Vol. 57 Issue 1, p243 

    Determines the effects of federal deficit on interest rates. Distinction between government spending and deficits; Causes of unanticipated deficits; Measurement of deficit spending.

  • Shilling Vulnerability Increases.  // West & Central Africa Monitor;Jan2003, Vol. 4 Issue 1, p4 

    Looks at the future of currency performance in Kenya as of January 2003. Concern over account deficit; Possibility that the country will remain dependent on short-term capital inflows; Deterioration in the current and services account; Support given by the U.S. interest rate cuts to the capital...

  • THE EFFECT OF FISCAL DEFICIT ON INTEREST RATE IN REPUBLIC OF CROATIA. Krtalic, Sandra; Benazic, Manuel // Conference Proceedings: International Conference of the Faculty ;2010, p1 

    The article discusses a study which examines the impact of fiscal deficit on interest rate in Croatia. Results show that increase in budget deficit affects the economy, specially interest rates which increases the borrowing costs of the other economic segments. It found that consumer prices...

  • Pressure On Hungary's Budget Deficit.  // Emerging Markets Monitor;2/21/2005, Vol. 10 Issue 43, p13 

    Discusses the challenges to Hungary's budget deficit in February 2005. Criticisms against the failure of the Hungarian government to improve its full year budget deficit target; Increase in real interest rates in the country; Impact of reduced value added tax income on public revenues;...

  • Deficit-Financed Tax Cuts and Interest Rates. Leduc, Sylvain // Business Review (Federal Reserve Bank of Philadelphia);2004 Second Quarter, p30 

    Proposals to lower taxes often meet with opposition in Congress. One argument is that lowering taxes without an equivalent fall in government spending may lead to future budget deficits, which will translate into higher long-term interest rates and a lower level of income. In this article,...

  • A Note on Deficit, Implicit Debt, and Interest Rates. Zijun Wang // Southern Economic Journal;Jul2005, Vol. 72 Issue 1, p186 

    This short note revisits the long-standing issue of the relationship between government borrowings and interest rates using vector autoregression (VAR) models. In particular, we consider the dynamic impacts of both official deficit and implicit debt on the interest rates. Two measures of...

  • Determinants of Public and Private Investment An Empirical Study of Pakistan. Saghir, Rabia; Khan, Azra // International Journal of Business & Social Science;2012, Vol. 3 Issue 4, p183 

    This paper analyses the determinants of public and private investment in Pakistan using time series data for the period 1970-2010. By using co-integration and error correction the analysis shows that government investment negatively effect private investment which shows crowding out effect. In...

  • Hungary: Monetary Easing To Be Moderate.  // Emerging Markets Monitor;11/29/2004, Vol. 10 Issue 32, p12 

    Reports on the decision of the National Bank of Hungary to cut interest rates in 2004. Factors that influenced the decision of the bank; Decrease in Hungary's inflation rate from May to September 2004; Forecast on account deficit for 2004.

  • International Developments.  // Economic Trends (07482922);Sep2001, p8 

    Focuses on the international trade. Decline on economic activity due to deficit on goods and services; Display dollar rate and trade balance; Analysis exchange and interest rate movements.


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics