What it Takes to Solve the U.S. Government Deficit Problem

25 Pages Posted: 9 Jul 2011 Last revised: 16 May 2012

See all articles by Ray C. Fair

Ray C. Fair

Yale University - Cowles Foundation; Yale School of Management - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2012

Abstract

This paper uses a structural multi-country macroeconometric model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/GDP ratio. It takes into account endogenous effects of changes in fiscal policy on the economy and in turn the effect of changes in the economy on the deficit. A base run is first obtained for the 2013:1-2022:4 period in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then transfer payments are decreased by an amount sufficient to stabilize the long-run debt/GDP ratio. The results show that transfer payments need to be decreased by 2 percent of GDP from the base run, which over the ten years is $3.2 trillion in 2005 dollars and $4.8 trillion in current dollars. The output loss is 1.1 percent of baseline GDP. Monetary policy helps keep the loss down, but it is not powerful enough in the model to eliminate all of the loss. The estimates are robust to a base run with less inflation and to one with less expansion.

Keywords: Federal deficit, Debt/GDP ratio

JEL Classification: E17

Suggested Citation

Fair, Ray C., What it Takes to Solve the U.S. Government Deficit Problem (May 16, 2012). Cowles Foundation Discussion Paper No. 1807. Available at SSRN: https://ssrn.com/abstract=1881593

Ray C. Fair (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
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203-432-3715 (Phone)
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HOME PAGE: http://fairmodel.econ.yale.edu

Yale School of Management - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

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