Working Paper: NBER ID: w1265
Authors: Olivier J. Blanchard
Abstract: There is widespread feeling that current deficits, in Europe and the U.S.,may hurt rather than help the recovery. This paper examines some of the issues involved, through a sequence of three models.The first model focuses on sustainability and characterizes its determinants. It suggests that the issue of sustainability may indeed ber elevant in some countries.The second model focuses on the effects of fiscal policy on real interestrates, and in particular on the relative importance of the level of deficits andthe level of debt in determining interest rates.The third model focuses on the effects of fiscal policy on the speed of the recovery. It shows how a sharply increasing fiscal expansion might be initially contractionary rather than expansionary.
Keywords: fiscal deficits; interest rates; economic activity; sustainability
JEL Codes: E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of deficits (H62) | repudiation of debt (G33) |
| size of deficits (H62) | increased uncertainty (D89) |
| increased uncertainty (D89) | offset expansionary effects of deficits (E62) |
| higher deficits (H62) | higher real interest rates (E43) |
| higher real interest rates (E43) | negative impact on economic recovery (F69) |
| anticipated deficits (H68) | higher real interest rates (E43) |
| anticipated deficits (H68) | reduced aggregate demand (E00) |
| expectations about future deficits (H68) | higher real rates (E43) |
| expectations about future deficits (H68) | reduced economic activity (F69) |
| current deficits (H62) | expansionary effects (F41) |