Working Paper: NBER ID: w1814
Authors: Ray C. Fair
Abstract: Somemacroeconomic effects of deficit targeting are estimated in thispaper using my U.S. econometric model. The response of the economy to realand price shocks is examined in a number of cases. Each case corresponds toa particular assumption about fiscal policy and a particular assumptionabout monetary policy. Estimates are also presented of the size of thegovernment spending cuts that are needed to meet a given deficit goal underdifferent assumptions about monetary policy.
Keywords: deficit targeting; macroeconomic effects; fiscal policy; monetary policy
JEL Codes: E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative demand shock (E31) | contraction in the economy (E32) |
| contraction in the economy (E32) | decreased government tax receipts (H29) |
| decreased government tax receipts (H29) | increased deficit (H62) |
| negative demand shock (E31) | contraction in taxable income (H26) |
| contraction in taxable income (H26) | decreased government tax receipts (H29) |
| decrease in real GNP (E20) | larger contraction under exogenous deficit (E19) |
| decrease in government spending (H56) | required cut of $312 billion to meet deficit target (H68) |
| price shocks (E30) | small net effect on the deficit (H62) |
| overall response of the economy to demand shocks (E00) | significantly larger under deficit targeting (H62) |