The Deficit Gamble

The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its implicat...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 1998-11, Vol.30 (4), p.699-720
Main Authors: Ball, Laurence, Elmendorf, Douglas W., Mankiw, N. Gregory
Format: Article
Language:English
Subjects:
Budget deficits
Budgets
Consumption
Debt
Deficit financing
Deficits
Dynamic efficiency
Economic efficiency
Economic growth
Economics
Federal budget deficit
Fiscal policy
Income taxes
Interest rates
Pareto improvement
Public debt
Pyramid schemes
Raises
Rates of return
Simulation
Standard of living
Studies
Tax increases
Taxes
Welfare economics
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Summary:The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its implications. Using a standard overlapping-generations model of capital accumulation, we show that whenever a perpetual rollover of debt succeeds, policy can make every generation better off. This conclusion does not imply that deficits are good policy, for an attempt to roll over debt forever might fail. But the adverse effects of deficits, rather than being inevitable, occur with only a small probability.
ISSN:0022-2879
1538-4616
DOI:10.2307/2601125