Possible Macroeconomic Consequences of Large Future Federal Government Deficits

Ray C. Fair ()
Additional contact information
Ray C. Fair: Cowles Foundation, Yale University, http://cowles.econ.yale.edu/faculty/fair.htm

No 1727, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: This paper uses a macroeconometric model of the U.S. economy to analyze possible macroeconomic consequences of large future federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. In the baseline run, which assumes no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. The estimates from this run are in line with other estimates. Various experiments off the baseline run are then done. If the dollar depreciates, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that the United States can inflate its way out of its deficit problem. If in addition U.S. stock prices fall, this makes matters worse by lowering output because of a negative wealth effect. Large personal tax increases or transfer payment decreases solve the deficit problem, but at a cost of considerable lost output over a decade. The Fed's ability to offset these losses is modest according to the model. Introducing a national sales tax is more contractionary than is increasing personal income taxes or decreasing transfer payments.

Keywords: Federal deficit; Federal debt (search for similar items in EconPapers)
JEL-codes: E17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009-09, Revised 2009-10
View list of references

Downloads: (external link)
http://cowles.econ.yale.edu/P/cd/d17a/d1727.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cwl:cwldpp:1727

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation, Yale University
Address: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Contact information at EDIRC.
Series data maintained by Glena Ames ().