What It Takes to Solve the U.S. Government Deficit Problem

Ray C. Fair ()
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Ray C. Fair: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/ray-fair

No 1807, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper uses a structural multi-country macroeconometric �model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/GDP ratio. �It takes into account endogenous effects of changes in fiscal policy on the economy and in turn the effect of changes in the economy on the deficit.�A base run is first obtained for the 2013:1-2022:4 period in which there are no major changes in U.S. fiscal policy.�This results in an ever increasing debt/GDP ratio.�Then transfer payments are decreased by an amount sufficient to stabilize the long-run debt/GDP ratio.�The results show that transfer payments need to be decreased by 2 percent of GDP from the base run, which over the ten years is $3.2 trillion in 2005 dollars and $4.8 trillion in current dollars.�The output loss is 1.1 percent of baseline GDP.�Monetary policy helps keep the loss down, but it is not powerful enough in the model to eliminate all of the loss. The estimates are robust to a base run with less inflation and to one with less expansion.

Keywords: Federal deficit; Debt/GDP ratio (search for similar items in EconPapers)
JEL-codes: E17 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-07, Revised 2012-05
New Economics Papers: this item is included in nep-mac and nep-pub
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