am an economics and history senior in the College of Arts and Sciences. I am a second year Gaines Fellow, and a recipient of the English Speaking Union Scholarship for summer study at Oxford University, and a National Merit Scholar. On campus, I am the co-founder and Chairman of the Moderates, Vice President of Phi Alpha Theta History honorary fraternity, and a member of Kappa Alpha Order social fraternity. My goal is to work as an attorney in some issue of domestic or foreign policy, hopefully with an economic orientation. This paper discusses a major issue within macroeconomic policy circles and is the type of work I hope to do as a consultant or government official in the future. My work for this paper was part of a semester long term paper for Economics 491G.
In fiscal year 2004, the United States budget deficit is expected to exceed $477 billion and be 4.2% of the Gross Domestic Product. As
J. T. Knadler explains in his introduction, the impact of deficits on the overall economy is still a matter of debate in economics. J. T.’s paper carefully reviews this debate and proposes a model and estimation approach to test the implications therein. The two most important questions are whether increased deficits lead to higher interest rates, and if these deficits have an impact on private savings. Using standard macro-economic variables and models, J. T. estimates a three equation system that models the deficit, interest rates, and savings. His creative use of Military personnel as an instrument of the deficit, combined with the standard use of currency in circulation as an instrument for the interest rate, make this paper an interesting contribution to a long and important literature on this topic. J. T. finds support for the traditional view that increasing deficits raise the interest rate, and little support for the view that savings is simply adjusted by perfectly forward-looking consumers. This paper represents a contribution to an important question in the macroeconomic literature.
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