generational accounting a meaningful way to evaluate fiscal policy this paper illustrates the technique of generational accounting a new way to evaluate fiscal policy that overcomes the inherent ambiguities of traditional deficit accounting the authors illustrate why there is no correct measure of the deficit and how generational accounting estimating the fiscal burdens current policy places on different generations provides a clearer picture of the intergenerational and macroeconomic effects of fiscal policy than any measure of the deficit their calculations suggest that despite recent changes u s fiscal policy is unsustainable in that it will ultimately require future generations to bear a much higher burden than those currently alive

interest rates and budget deficits cross country evidence from the period 1924 1938 abstract this paper examines the question of whether budget deficits raise nominal interest rates the empirical analyses make use of cross country data from 16 countries covering the period 1924 1938 contrary to some recent studies by e g evans it turns out that budget deficits affect nominal rates positively and thus the ricardian equivalence proposition can be questioned

tapping the supercomputer under your desk solving dynamic equilibrium models with graphics processors this paper shows how to build algorithms that use graphics processing units gpus installed in most modern computers to solve dynamic equilibrium models in economics in particular we rely on the compute unified device architecture cuda of nvidia gpus we illustrate the power of the approach by solving a simple real business cycle model with value function iteration we document improvements in speed of around 200 times and suggest that even further gains are likely

amortization requirements and household indebtedness an application to swedish style mortgages abstract since the mid 1990s many oecd countries have experienced a substantial increase in household indebtedness sweden in particular has seen indebtedness rise from 90 of disposable income in 1995 to 179 in 2015 the swedish financial supervisory authority fsa has identified mortgage amortization requirements as a potential instrument for reducing indebtedness and has drafted guidelines that will intensify the rate and duration of amortization in this paper i characterize swedish style mortgage contracts which differ substantially from u s style contracts i then evaluate the policy changes in an incomplete markets model with three types of debt and a novel mortgage contract specification that is calibrated to match swedish micro and macro data i find that intensifying the rate and duration of amortization is largely ineffective at reducing indebtedness in a realistically calibrated model in the absence of tight restrictions on the maximum debt service to income ratio or implausibly large refinancing costs the policy impact is small in aggregate over the lifecycle and across employment statuses

new tests of the life cycle and tax discounting hypotheses abstract we first test a version of the permanent income consumption function recently suggested by barro the results support the theory except that consumption expenditures show sensitivity to transitory income next we use the consumption model to test the tax discounting hypothesis which is strongly supported this support for tax discounting disagrees with results from some earlier studies using more traditional specifications of the consumption function however we show that when certain obviously inadequate estimation procedures are corrected the traditional models also support tax discounting this uniform support for tax discounting suggests that the sensitivity of consumption to transitory income is not due to liquidity constraints

a hardware approach to value function iteration abstract this paper proposes a novel approach for the computation of dynamic stochastic equilibrium models we design an fpga specialized in the computation of a bellman equation via value function iteration vfi our hardware approach exhibits significant speed gains vis a vis gpu based data parallelization techniques the speed gains arise from two layers of parallelism accessible to hardware developers instruction level and pipeline parallelism at the logical resources level by and large the paper documents significant computational speed gains from hardware specialization so far unexplored by the macroeconomic literature

endogenous government spending and ricardian equivalence many analyses of debt policy assume exogenous government expenditures instead the author uses an optimizing model in which the government endogenously selects values of taxes spending and debt to maximize welfare if demand for publicly provided goods is elastic a debt financed tax cut increases consumption because individuals rationally expect some reduced government spending in the future even though future taxes rise they do not offset the expansionary effect of the current tax cut on consumption depending on preferences the marginal propensity to consume out of tax cuts can take any value between zero and the marginal propensity out of ordinary income copyright 1992 by royal economic society

line item veto where is thy sting roponents of giving the president the authority to use a line item veto argue that the institutional change is needed to limit special interest legislation and restrain spending opponents respond that it would grant too much added power to the president thereby upsetting the delicate balance wisely crafted by the founding fathers this article focuses on the presumption evidently shared by both sides in the debate that adoption of item veto authority will have significant consequences in terms of budget outcomes and the distribution of power 1 curiously there presently exists little empirical support for the presumption that item veto authority is important most studies comparing states with various types of veto authority have failed to detect significant effects associated with item veto additional tests of our own are consistent with these results after reviewing the empirical evidence we reconsider the alleged effects of item veto authority by seating the popular depiction in an explicit model of the budgetary process formal modeling exposes logical inconsistencies contained in popular veto discourse further the model makes clear that the predicted consequences of item veto commonly projected as ubiquitous in fact arise only in select settings

government deficits and the term structure of interest rates abstract this paper investigates the effects of government deficits on interest rates with different terms to maturities a nonlinear term structure model with a time varying term premium is presented as a vehicle to discuss the ricardian equivalence hypothesis it is found that the nonlinear term structure model of the equivalence hypothesis that allows for a time varying term premium and a conditional heteroskedasticity is compatible with the data and performs far better than does the linear model

principles of fiscal and monetary policy abstract this paper describes a complete and internally consistent set of principles for the conduct of a welfare maximizing fiscal and monetary policy issues of time consistency that arise in applying these principles to actual economics are also discussed

is the dollar high because of large budget deficits abstract it is widely believed that the u s dollar has been high in recent years because of large u s budget deficits using three statistical techniques this paper shows that the belief has no empirical support ricardian equivalence may explain the lack of a positive association between the budget deficit and the dollar s exchange rate

the differing effects of pre and post 1981 federal budget deficits on tax adjusted real interest rates this paper employs an estimating equation relating tax adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre and post 1981 federal budget deficits on ex ante and ex post real tax adjusted short term interest rates over the period 1961 1 1992 2 the results for the 1961 1 1992 2 period taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential gdp occurring in 1981 1 indicate that the ratio of both the nipa deficit and the cyclically adjusted deficit to potential gdp have a significant effect on ex ante and ex post real tax adjusted interest rates for the post 1981 period but no significant effect before 1981

technological heterogeneity and corporate investment we propose an importance sampling procedure to improve the computational performance of the simulated method of moments smm for the estimation of structural models with fixed parameter heterogeneity the main advantage of the procedure is that it does not require to simulate observations every time that the structural parameters change during the minimization of the smm criterion function we illustrate the use of our method by estimating a neoclassical model of investment for a sample of us manufacturing companies allowing the technological parameters to vary across firms

uncertainty and the neutrality of government financing policy abstract some ideas from the theory of finance are applied to consider whether debt financed tax cuts affect desired consumption it is shown that government financing policy is a matter of indifference to infinitely lived households if a perfect substitute for public debt exists the analysis allows for uncertainty about future taxes and for missing markets in some kinds of assets income redistribution risk and the public insurance aspects of an income tax scheme qualify this neutrality result but in general the net effect is ambiguous the real resource costs of financial transacting as well as government superiority in the intermediation process may be one rationale for activist debt management policy a better understanding of functioning capital markets is essential to evaluate these arguments

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

comparing solution methods for dynamic equilibrium economies this paper compares solution methods for dynamic equilibrium economies the authors compute and simulate the stochastic neoclassical growth model with leisure choice using undetermined coefficients in levels and in logs finite elements chebyshev polynomials second and fifth order perturbations and value function iteration for several calibrations the authors document the performance of the methods in terms of computing time implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence

the sustainability of bond financed deficits an overlapping generations approach abstract the last decade has witnessed a dramatic and fundamental shift in the expenditure and taxation policies of many western democracies a shift unprecedented in peacetime history balanced budgets have virtually disappeared from the scene in their place deficit financing has arisen as an alternative for many countries becoming a focus of both professional interest and public debate the current literature has examined this issue by assessing the likelihood that governments violate their intertemporal budget constraint this paper takes a different tack we incorporate permanent fiscal deficits into an overlapping generations model and evaluate the implications we already know that if the steady state interest rate is less than the growth rate then permanent deficits are indeed sustainable however this is a necessary but not a sufficient condition in addition these deficits and the current stock of debt must also not be too big we calibrate the model to u s data with plausible parameters of taste and technology derive the theoretical limit to the maximal sustainable deficit implied by this model and discuss the relevance of our findings for current policy issues

the abrams curve of government size and unemployment evidence from panel data this study investigates the long run relationship between government size and unemployment rate the abrams curve using ten european countries over the period 1961 1999 to this end panel cointegration analysis and estimation techniques appropriate for heterogeneous panels are made use of the results support the idea that there is an abrams curve and the relation between government size and the unemployment rate is positive

inflation and government deficits there is a pronounced positive correlation of inflation andgovernment deficits in the united states since world war ii the purpose of this paper is to test the three leading explanationsof this correlation these three explanations are a a deficitincreases prices through a wealth effect b a deficit results inthe federal reserve purchasing debt thus increasing the moneysupply and prices and c expected inflation increases the deficit which is the change in the nominal value of bonds no supportis found for either of the first two hypotheses the results indi cate that expected government deficits have no significance forfuture inflation since world war ii the united states has experienced large federal government deficits and a sustained peacetime inflation three differentconnections between the deficits and inflation are prominent in theliterature the most direct connection between government deficits and inflationis that by increasing the real value of outstanding bonds and perceived netwealth a deficit can raise total spending and the price level this connec tion is also the most long standing and is suggested by metzler 1951 andpatinkin 1965 for example monetarists generally and buchanan and wagner 1977 in particularhave emphasized a different link between deficits and inflation they sug gest that the federal reserve purchases government bonds when the trea sury sells bonds thus increasing high powered money the money supply and the price level the federal reserve might behave this way for exam ple because it is attempting to hold down interest rates on governmentsecurities when deficits occur recently barro 1978 1979 has put forward a hypothesis that deficitsare a result of inflation rather than inflation being a result of deficits thegovernment deficit is the change in the nominal value of outstanding gov ernment bonds if the anticipated inflation rate increases then the nomi nal value of bonds must increase i e the government will run a deficit tokeep the same anticipated real amount of bonds all three of these possible connections between government deficitsand inflation are consistent with the observed positive correlation of defi cits and inflation the implications however are strikingly different con

a fast estimation procedure for discrete choice random coefficients demand model we document speed up gains of graphical processing unit gpu computing over central processing unit cpu for the estimation of discrete choice random coefficient demand model when we use a moderate sized gpu the computation is six to twenty times faster where the smallest speed up factor six is obtained from a comparison with the parallel computing over sixteen cpu cores

disaggregate supply evidence for the uk 1989 disaggregate supply evidence for the uk applied economics vol 21 no 10 pp 1397 1409

the deficit interest rate link empirical evidence for canada this paper explores whether a positive relationship exists between interest rates nominal or real and deficits as postulated by a conventional macroeconomic model mundell fleming using spectral and time series techniques annual and quarterly data for canada and a variety of definitions for the deficit and government spending variables no empirical link between deficits and interest rates could be detected it is suggested therefore that the evidence is inconsistent with themundell fleming model which predicts a positive association between interest rates and deficits a possible explantion for the observed empirical results may be found in the ricardian equivalence theorem

the welfare costs of deficit finance we analyze the welfare consequences of deficit finance in a general equilibrium model fit to the us economy current spending may be financed with current and or future distortionary taxes the economy is open to international capital flows the welfare costs of financing marginal current spending are substantial and are sensitive to the timing of the required taxes postponing a tax on labor income is advantageous but postponing a tax on asset income is not ricardian equivalence poorly approximates the economy we consider

structural federal deficits and interest rates some causality and co integration tests the relationship between federal budget deficits and interest rates has been the focus of extensive research recently cebula 4 examined this relationship empirically and concluded that the federal budget deficit does in fact exercise a positive and significant impact upon the nominal moody s aaa rated corporate bond rate 4 208 such a finding is at odds with the great majority of recent empirical studies in this area if valid this finding assigns to large deficits significant adverse effects on both private investment crowding out and on trade balance via an overvalued dollar given these profound public policy implications cebula s finding warrants further examination

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

benchmarking machine learning software and hardware for quantitative economics abstract we investigate the performance of machine learning software and hardware for quantitative economics we show that the use of machine learning software and hardware can significantly reduce computational time in compute intensive tasks using a sovereign default model and the least squares monte carlo option pricing algorithm as benchmarks we show that specialized hardware and software speed up calculations by up to four orders of magnitude when compared to programs written in popular high level programming languages such as matlab julia python numpy and r and high performing low level languages such as c

on the relative unimportance of a balanced budget this paper explores the reasoning underlying milton friedman s preference for a small unbalanced budget over a large balanced one because the marginal return from government spending is less than the marginal cost measured in terms of the amount of income private individuals remain free to spend government expenditures have more of an adverse impact on the economy in his view than does the method of financing that spending using a panel data set comprising the 50 states plus the district of columbia we report evidence from the years 1967 through 1992 that growth rates in income per capita tend to be higher in states with smaller public sectors moreover we find that while both deficits and taxes reduce the rate of income growth in a state the negative impact of government spending is considerably larger at the margin

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

interest rates and budget deficits revisited evidence from the g7 countries this article revisits whether budget deficits affect interest rates and broadens the literature by examining whether financial globalization has changed this relationship a structural model of interest determination is extended to account for the fact that official capital flows are determined differently than private flows and is estimated for a 1960 2005 g7 panel we find that deficits have a significant but small effect on long term rates but that this result depends on the fiscal concept used moreover we find no evidence of structural change in interest rate determination in the recent decades with the exception of an increased impact of insurance related capital inflows in recent years

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

financing decisions and the crowding out effect abstract this study empirically assesses the relevance of the crowding out effect in the case of a developing country the philippines the finding of a crowding out effect from the issue of government debt is not due to a lack of rationality

a cointegrating approach to budget deficits and long term interest rates a cointegrating approach is undertaken in this study to determine if there is a long run equilibrium relationship between budget deficits and long term interest rates for the united states and nine european countries the cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables the cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries which would seem to appeal to the view of budget deficits having a positive impact on long term interest rates the hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one

is a military really a luxury good an international panel study of ldcs this paper introduces country specific fixed effects into a theoretical and empirical model of military expenditure contrary to the existing literature the model indicates that the share of military expenditure decreases with a country s income

fiscal policy and interest rates in europe the appetite for fiscal discipline has been steadily declining among most industrial countries in the past fiscal profligacy would have been punished by markets with higher interest rates and in some cases also exchange rate depreciation however in post emu europe exchange rate markets no longer discipline the fiscal behaviour of national governments perhaps more crucially even the interest rate punishment to fiscal indiscipline is highly uncertain with academic opinions being quite divided on this issue this paper takes a close look at the link between fiscal policy and interest rates in the european context the key finding is that an expansionary fiscal policy in one emu member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole with the second effect however being quantitatively much more significant this suggests that there are indeed substantial spillovers through the interest rate channel among fiscal policies of member countries to limit countries incentive to run expansionary fiscal policies a set of rules like those embedded in the stability and growth pact is then needed some weak evidence is also found that after emu interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress there may be a case then for imposing tighter rules on high debt countries riccardo faini

bureaucracy inefficiency and time this paper examines the bureaucrat s choice between devoting resources to economic rents organizational slack and maximizing the budget of the agency a new model of bureaucracy is developed using utility rather than a demand function as its foundation it is shown that increases in income alter the slack budget constraint to favor organizational slack over budget maximization modern federal bureaucracies in the u s are predicted to be slack maximizing and x inefficient

the impact of banking and fiscal policies on state level economic growth this paper investigates the hypothesis that economic growth is affected by banking structure and fiscal policies we use data from the 48 contiguous states for the period 1950 1980 aggregated into six five year time periods primarily to test the effect of the following factors on growth of state per capita income i restrictions over branch banking ii restrictions over multibank holding companies iii the depth of financial assets in a state iv the financialintermediary mix v the size of state government and vi the methods of financing state government we find no support for the hypotheses that branch banking or multibank holding company restrictions affect growth however financial depth and the mix of financial intermediaries are strongly correlated with economic growth finally the state fiscal policy variables had no significant effect on income growth

deadweight losses and the saving response to a deficit deadweight losses and the saving response to a deficit several recent empirical studies have challenged the conventional wisdom that deficits cause a higher interest rate many economists are however critical of the seemingly implied theoretical justification that every individual fully recognizes the size of the deficit and the extent to which it increases future tax liabilities this paper demosntrates that far weaker information assumptions are needed to obtain an aggregate savings response equal to the deficit a reallocation of deadweight losses causes ricardians to save more than their share of the deficit to keep consumption unaffected allowing for a substantial fractrion of keynesians who save less than their share 1 introduction the saving behavior in the ricardian equivalence theorem is often criticized for relying on perfect foresight e g buchanan 1976 and evans 1985 85 even david ricardo himself rejected what is nowadays termed the ricardian equivalence theorem on grounds that people are not sufficiently aware of future tax liabilities see o driscoll 1977 this paper demonstrates that the saving response obtained by the ricardian equivalence theorem saving oing up by the deficit with a constant interest rate can be obtained with weaker rationality assumptions when deadweight losses associated with nonlump sum taxation are accounted for deadweight losses have been overlooked in the deficit debate possibly because the deadweight loss estimates in the public finance literature were rather small up until a few years ago the first mention of deadweight losses we have found is the brief theoretical discussion of transactions costs in collecting taxes and issuing debt in barro 1974 1109 deficits and welfare is an issue currently debated but the question posed is usually the reverse of the one asked here while we analyze how welfare losses affect the macro consequences of a deficit recent studies have focused on whether deficits increase or decrease welfare for instance both chan 1983 and barsky et al 1986 have studied whether deficits are desirable or not though analyzing how uncertainty of present and future after tax income are affected 1 futher a recent article by hansson and stuart 1987 estimated the losses from labor and capital taxes in a current and a future time period to evaluate the welfare consequences of a reallocation of taxes over time the theoretical argument made in this paper might be viewed as an obvious elaboration of the ricardian equivalence theorem nevertheless given current parameter estimates of deadweight losses the argument turns out to be very important quantitatively a simple illustration will demonstrate that far from everyone perhaps less than half of the population needs to have rational foresight about the deficit in order for a deficit to generate a one to one response in saving ii the behavior of ricardian individuals the effect of taxes altering efficiency and deadweight losses in each of the two time periods the standard ricardian equivalence theorem is arrived at assuming lump sum taxation with no deadweight losses accompanying taxation according to the theorem a deficit has the equivalent effect of current taxation because people anticipate the future tax liability incurred with the deficit these ricardian individuals have no reason to alter their labor supply the production techniques or their consumption pattern all that a deficit therefore results in is an increase in savings that is exactly equal to the deficit how would the analysis change if nonlump sum taxations is allowed for and associated with deadweight losses one shoudl have to analyze which particular tax is cut today and which is raised tomorow when the deficit is generated and how both affect the desired levels of labor suplly consumption etc today and in the future

tax revenue and the marginal cost of public funds in sweden abstract we assess the welfare cost of raising a marginal unit of tax revenue in a balanced budget general equilibrium framework the calculated social cost of an increment of public funds is sensitive to both the specific type of tax increase and the type of public spending used on the margin best guess assumptions on labor supply elasticities yield marginal costs of public funds for different fiscal mixes of between 0 67 and 4 51 at prevailing tax rates in sweden alternative labor supply assumptions well within the range of current estimates substantially affect the results and can imply infinite marginal welfare costs marginal welfare costs are also sensitive to assumptions about both the income and substitution effects of labor supply

fiscal policy and the term structure abstract this paper investigates the empirical association between deficits in interest rates it extends the results in plosser 1982 to include the more recent experience the association between a measure of ex ante real rates and deficits is also considered the results largely corroborate the previous results first little or no association between real or nominal interest rates and deficits is found second output and to a lesser extent military spending are found to have a significant association with interest rates

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

the effect of government size on the unemployment rate recent empirical studies have revealed that the size of government is inversely related to economic growth and technical efficiency evidence is presented linking the size of government to reported unemployment rates for the industrial countries during recent years this finding helps to explain the empirical link between government size and poor macroeconomic performance

monetary independence under bretton woods perspectives from a stochastic maximizing model research based on the kouri porter 1974 model of international capital flows suggests that the central banks of nonreserve countries enjoyed considerable monetary independence during the bretton woods era this paper is a theoretical and empirical reassessment of this conclusion using a stochastic maximizing model it is shown that the existence of imperfect asset substitutability does not guarantee monetary control at the empirical level the estimated offset coefficients for four industrialized countries are consistent with zero monetary independence

interest rates expected future deficits and tax proposals interest rates expected future deficits and tax proposals i introduction in several recent publications paul evans 1985 1987 1988a 1988b presents evidence suggesting a negative wealth effect in response to federal deficits evans 1987 investigates the impact future deficits have on current interest rates while he argues that expectations of future deficits are based in part on past history he also recognizes that economic agents could observe the legislative process and assess how likely congress is to enact new tax legislation appreciably affecting future budget deficits 1987 45 evans assumes that legislative information is both relevant and available but does not include it as a regressor instead he looks to the error term and tries to unpack the effect of tax legislation a more straightforward method for testing this hypothesis is to simply include a tax legislation variable in the estimated equation ii methodology the reduced form equation to be tested is delta i sub nt f delta i sub t j delta g sub t i delta m sub t i delta t sub t i where i is the nominal interest rate on an n period bond g is government purchases of goods and services d is the federal deficit variable and is simply the difference between federal outlays and federal receipts m is the money stock m1 t is a variable that reflects tax legislation currently being considered by congress j 1 2 3 and i 0 1 2 3 by incorporating the tax variable into the relevant information set the impact of tax legislation if there is one may be detected 1 the tax variable is constructed in the following manner major federal tax proposals enacted during the estimation period are taken from pechman 1987 the proposed revenue impact figures that were used by congress while these bills were being considered are included in congressional quarterly almanac along with a description of each tax proposal this information is treated as the best guess as to the economic impact of these tax proposals and is the information available to the market it is these estimated revenue impact figures that are included in the tax variable t many of the tax proposals during the sample period were multi year and their estimated revenue impacts extended over that time period in addition some tax proposals overlapped so that their individual impacts must be aggregated as an example the excise tax reduction act of 1965 provided a series of cuts over three and one half years the estimated impact for 1966 the second stage of the act was that revenue would fall by 1 6 billion or 4 billion per quarter at the same time the tax adjustment act of 1966 sought to increase taxes to dampen an inflationary trend brought on by the financing of the vietnam war revenues were expected to increase by 1 13 billion during the second quarter of 1966 and by 1 2 billion per quar ter over the 1967 fiscal year the combined effect of these two proposals during 1966 is illustrated in table i the ta x variable is the expected change in the deficit for the succeeding quarter in 1966 i the deficit was 0 6 billion and ceteris paribus could be expected to fall 73b the next quarter due to imminent tax changes the tax variable gives an indication of the future path that the deficit will take 2 iii results table ii shows the results obtained from the above equation using quarterly data from 1959 i 1984 iv 3 both a short and long term interest rate are used in this study 4 the short term rate s is the yield on newly issued taxable three month u s government securities and the long term rate l is the yield on u s treasury bonds due or callable in ten years or more the lag lengths used two and four lags coincide with those used by evans 1987 as does the differenced data and finally evans argues that the sums of the coefficients of individual variables provide the most meaningful information consequently those are presented

bureaucratic choice and nonoptimal provision of public goods theory and evidence local governments allocation decisions are modeled in the context of a slack maximizing bureaucrat who produces public goods according to a production function that includes both provision and the constituents socio economic characteristics to gain a better understanding of the determinants of slack comparative statics and an empirical study of illinois municipalities are conducted the indirect output distance function provides efficiency scores upon which we regress several variables representing socio economic characteristics costs and competition measures we find that slack or inefficient behavior is associated with richer communities lower education levels and a lack of competition for residents among municipalities

fiscal policy and private investment expenditure a study of australia and the united states the effect of government spending on private sector s investment and profitability is examined within the context of an open economy macro model the empirical results of the study indicate that the private investment expenditure in australia and the united states is crowed out by government investment and government consumption respectively these results are in conflict with the hypothesis of fiscal neutrality in addition the empirical results of corporate profitability provide no support for the complementary relationship between public and private investment expenditure

fiscal deficits and long term interest rates further evidence from annual data much debate has recently centered on the popular view that large u s budget deficits financed by the sale of bonds cause high interest rates if valid this view implies that deficits crowd out efficient private investment and adversely affect economic growth however bailey 2 and barro 3 have challenged this conventional view on theoretical grounds based on the ricardian equivalence proposition bailey and barro contend that rational economic agents interpret government deficits as postponed tax liabilities and thus will have no effects on private wealth or interest rates such theoretical ambiguity in regards to the impact of budget deficits has also been matched by an equally conflicting empirical evidence for example barth iden and russek 4 deleeuw and holloway 8 hutchison and pyle 20 makin 24 makin and tanzi 25 and zahid 35 have found a positive and significant effect of deficits on interest rates on the other hand evans 11 12 13 hoelscher 17 motley 28 and plosser 29 30 have all failed to find any systematic support for a significant positive impact of deficits on interest rates it should be observed that the above empirical studies have employed either monthly or quarterly data however some researchers e g hoelscher 18 have recently charged that monthly or quarterly data bias the results in favor of finding no significant linkage between deficits and interest rates they reasoned that portfolio adjustment lags are too long for monthly or even quarterly observations to reflect the actual correlation between deficits and interest rates to eliminate this problem of periodicity annual data was instead advocated 2 using annual data hoelscher 18 concluded that deficits have caused positive and significant changes in long term interest rates in the united states

a test of steady state government debt neutrality a test of steady state government debt neutrality this paper investigates whether in the steady state the real interest rate is an increasing function of both the government debt and government spending using data from the period between january 1981 and march 1986 the paper finds no evidence of such a relationship these data afford an especially powerful test because the ratio of federal debt to trend output which had fallen from 93 to 33 percent between january 1948 and december 1980 reversed course after the enactment of the economic recovery tax act reaching 47 percent in march 1986 i introduction in conventional macroeconomic analysis government debt is not neutral because households view it as contributing to their net wealth as a result the larger the government debt is the wealthier households feel and the more they consume more consumption in turn spells less investment over time and thus a lower steady state capital stock as a result output is ultimately lower and the real interest rate higher in principle however households need not view government debt as net wealth 1 if households accurately foresee the future taxes that will service the government debt if they face perfect capital markets if taxes do not distort their decisions and if they internalize future generations then they treat the future taxes servicing the government debt as an exact offset consequently government debt is neutral since it does not make households feel wealthier and hence affects nothing 2 nevertheless because most macroeconomists doubt that households accurately foresee future servicing taxes have access to perfect capital markets and internalize future generations they do not model government debt as neutral like perfect competition however government debt neutrality may be a good approximation in many applications even if the assumptions underlying it are unrealistic therefore empirical analysis rather than introspection should determine how one models government debt this paper provides such an empirical analysis the empirical analysis focuses on the steady state relationship between government debt and the real interest rate 3 in the steady state a larger government debt leads to a smaller capital stock and hence a higher marginal product of capital if households view government debt as net wealth consequently the real interest rate is also higher if instead government debt is neutral nothing should happen to the real interest rate u s data from the period between january 1981 and march 1986 have been used here to investigate whether a larger government debt leads to a higher real interest rate in the steady state and hence whether government debt is neutral these data afford an especially powerful test because the ratio of federal debt to trend output which had fallen from 94 to 33 percent between january 1948 and december 1980 reversed course after the enactment of the economic recovery tax act reaching 47 percent by march 1986 moreover this upward trend is likely to continue well beyond 1986 such an enormous increase in federal debt should have raised by steady state real interest rate appreciably if households view government debt as net wealth to any important extent in the absence of evidence that the steady state real interest rate did rise government debt is judged to be neutral in the steady state section ii formulates the model which is estimated in sections iii and iv section v summarizes the paper and then briefly reviews an extensive literature consistent with government debt neutrality ii formulation of the econometric model the appendix demonstrates that if households view government debt as net wealth the real interest rate should be an increasing function of both the government debt and government spending in the steady state see also evans 1988 for this analysis

do budget deficits raise nominal interest rates evidence from six countries abstract it is widely believed that budget deficits raise nominal interest rates this paper shows that the belief has no empirical support for six countries ricardian equivalence may explain the lack of a positive association between budget deficits and nominal interest rates