Working Paper: NBER ID: w18797
Authors: Robert E. Hall
Abstract: Using a recursive empirical model of the real interest rate, GDP growth, and the primary government deficit in the U.S., I solve for the ergodic distribution of the debt/GDP ratio. If such a distribution exists, the government is satisfying its intertemporal budget constraint. One key finding is that historical fiscal policy would bring the current high debt ratio back to its normal level of 0.35 over the coming decade. Forecasts of continuing increases in the ratio over the decade make the implicit assumption that fiscal policy has shifted dramatically. In the variant of the model that matches the forecast, the government would not satisfy its intertemporal budget constraint if the policy was permanent. The willingness of investors to hold U.S. government debt implies a belief that the high-deficit policy is transitory.
Keywords: No keywords provided
JEL Codes: C58; E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Stabilization of the debt-to-GDP ratio (H63) |
| Persistent deficits (H62) | Rising debt levels (H63) |
| Primary deficit does not respond to rising debt levels (H62) | Likelihood of a debt crisis increases (F34) |
| Historical fiscal policy (E62) | Current debt ratio back to normal level of 0.35 (G32) |