Working Paper: NBER ID: w1632
Authors: James D. Hamilton; Marjorie A. Flavin
Abstract: This paper seeks to distinguish empirically between two views on the limitations of government borrowing. According to one view, nothing precludes the government from running a permanent budget deficit, paying interest due on the growing debt load simply by issuing new debt, An alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms. We show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals. Empirical tests which have been developed for this economic question lead us to conclude that postwar U.S. deficits are largely consistent with the proposition that the government budget must be balanced in present-value terms.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government borrowing (H74) | future surpluses (H62) |
| Failure to balance budget in present value terms (H69) | increased borrowing costs or refusal to purchase debt (H74) |
| Deficits without credible future surpluses (H62) | inflationary pressures (E31) |