Abstract

The primary motivation for a wide variety of studies over the past decade on the macroeconomic effects of government debt is the Ricardian equivalence hypothesis, popularized by Barro [2]. The Ricardian view holds that government debt is not net wealth. As a consequence, a shift from a lump-sum tax to bond finance of government purchases has no effect on macro variables such as output, prices or interest rates. In contrast, the conventional argument holds that government debt is wealth and hence that shifting from lump-sum taxation to bond finance of government purchases will have first-order macroeconomic effects. Controversy over the Ricardian equivalence hypothesis has occurred at both theoretical and empirical levels. For example, the theoretical underpinnings of the Ricardian equivalence hypothesis have been disputed by Tobin and Buiter [38] and Brunner [6]. Recent empirical work has not resolved the controversy. For instance, Yawitz and Meyer [40], Feldstein [18], Makin [28], Eisner and Pieper [17], deLeeuw and Holloway [13], and Hoelscher [21] find evidence that debt affects output, consumption or interest rates. However, other studies find the opposite; see, e.g., Kochin [24], Tanner [37], Plosser [32], Dwyer [14], Kormendi [25], Hoelscher [22], Evans [15; 16], Seater and Mariano [33], Aschauer [1] and McMillin [29].' The objective of this study is to analyze empirically the effects of federal government debt on the macroeconomy for the period 1963:2-1984:4. An important distinction between this and most earlier analyses is that the effects of debt on key macro variables (output, prices and a longterm interest rate) are analyzed here within the context of a small empirical macro model.2 A

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