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The Deficit Gamble

Laurence Ball (), Douglas Elmendorf () and N. Gregory Mankiw ()

No 5015, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

Date: 1995-02
Note: EFG
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Published as Journal of Money, Credit and Banking, Vol. 30 (November 1998): 699-720.

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Journal Article: The Deficit Gamble (1998)
Working Paper: The Deficit Gamble (1995)
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