Working Paper: NBER ID: w5263
Authors: Laurence Ball; N. Gregory Mankiw
Abstract: This paper discusses the effects of budget deficits on the economy in four steps. First, it reviews standard theory about how budget deficits influence saving, investment, the trade balance, interest rates, exchange rates, and long-term growth. Second, it offers a rough estimate of the magnitude of some of the effects. Third, it discusses how budget deficits affect economic welfare. Finally, it considers the possibility that continuing budget deficits in a country could lead to a 'hard landing' in which the demand for the country's assets suddenly collapses.
Keywords: budget deficits; economic growth; financial crisis; national saving; investment
JEL Codes: E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| budget deficits (H62) | national saving (D14) |
| national saving (D14) | investment (G31) |
| national saving (D14) | net exports (F29) |
| investment (G31) | interest rates (E43) |
| interest rates (E43) | investment (G31) |
| interest rates (E43) | exchange rates (F31) |
| exchange rates (F31) | net exports (F29) |
| budget deficits (H62) | interest rates (E43) |
| interest rates (E43) | imports (F14) |
| budget deficits (H62) | trade deficit (F14) |