Bridge over ocean
1 May 2006 Financial Analysts Journal Volume 62, Issue 3

Not All Deficits Are Created Equal

  1. John A. Tatom

Recent academic and popular discussions of budget deficits rely on a simplistic, and largely false, conception of the effects of deficits. The effects depend on the source of the deficit and on private-sector responses to it. Also important are whether budget changes arise passively through the workings of the business cycle and whether deficit-inducing policy actions are permanent or transitory. The key expectations arising from the simple theories connecting interest rates and deficits are precisely opposite to what modern theory and evidence indicate.

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