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Deficits, expected deficits, financial markets, and the economy

Authors
Journal
The North American Journal of Economics and Finance
1062-9408
Publisher
Elsevier
Publication Date
Volume
17
Issue
1
Identifiers
DOI: 10.1016/j.najef.2005.05.001
Keywords
  • Budget Deficits
  • Current-Account Deficits
  • Interest Rates
  • Financial Instability
Disciplines
  • Economics

Abstract

Abstract This paper assesses the implications of U.S. budget and current account deficits for financial and economic stability. The primary focus is on the behavior of interest rates in response to deficits, then effects on the economy through the financial system. The paper argues, and shows with empirical evidence, including from a large-scale econometric model, that expected, but not realized, budget deficits affect interest rates. Under certain circumstances, particularly near full employment, sustained budget and current account deficits can lead to financial disarray and a severely constrained economy.

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