BALANCED BUDGETS: ECONOMIC NIRVANA OR FISCAL CHAOS?

Richard H. Day

Contemporary Economic Policy, 1996, vol. 14, issue 2, 15-25

Abstract: This paper investigates the effect of a pay‐as‐you‐go, balanced budget policy on macroeconomic performance. It uses a simple model of the aggregate demand for money and goods, with temporary monetary equilibrium and quantity adjustments on goods markets. Within this framework, if the monetary/real interaction is strong enough, a balanced budget with sufficiently high tax rates (≡ sufficiently high government expenditures) is consistent with typical bounded fluctuations around a relatively high income, low unemployment equilibrium. Lower tax rates (≡ lower government expenditures) can trigger a sharp decline in revenues, expenditures, employment, and output.

Date: 1996
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https://doi.org/10.1111/j.1465-7287.1996.tb00610.x

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