Working Paper: NBER ID: w7647
Authors: benjamin m friedman
Abstract: This paper looks again at the U.S. deficit debate of the 1980s, this time with the benefit of the Commerce Department's newly revised data for that period and also in light of the experience of the 1990s when sizeable budget surpluses replaced chronic large deficits. The familiar conclusion that sustained government deficits at full employment depress private capital formation has stood up well in both regards. By contrast, the more recent experience in particular has sharply contradicted any simple notion that the government balance and the current account balance move in parallel. Other relevant issues include the equilibrium (that is, noninflationary) unemployment rate, the response of private saving to government dissaving, and the role of debt and equity in financing private capital formation.
Keywords: No keywords provided
JEL Codes: H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustained government deficits during the 1980s (H62) | depressive effect on private capital formation (E22) |
| sustained government deficits during the 1980s (H62) | reduced private investment (H54) |
| disappearance of deficits in the late 1990s (H62) | significant increase in investment rates (E22) |
| elimination of government deficits (H69) | greater private investment (H54) |
| fiscal policy can influence investment outcomes even in the absence of deficits (E62) | increased private investment (E22) |
| government spending and private saving (E20) | overall economic activity (E66) |