On the Limitations of Government Borrowing: A Framework for Empirical Testing / James D. Hamilton, Marjorie A. Flavin.

Format:

Book

Author/Creator:

Hamilton, James D.

Contributor:

National Bureau of Economic Research.

Flavin, Marjorie A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1632.

NBER working paper series no. w1632

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

On the Limitations of Government Borrowing

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1985.

Summary:

This paper seeks to distinguish empirically between two views on the limitations of government borrowing. According to one view, nothing precludes the government from running a permanent budget deficit, paying interest due on the growing debt load simply by issuing new debt, An alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms. We show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals. Empirical tests which have been developed for this economic question lead us to conclude that postwar U.S. deficits are largely consistent with the proposition that the government budget must be balanced in present-value terms.

Notes:

Print version record

June 1985.