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November/December 1988, 
Vol. 70, No. 6
Posted 1988-11-01

The Macroeconomic Effects of Deficit Spending: A Review

by K. Alec Chrystal and Daniel L. Thornton

K. Alec Chrystal and Daniel L. Thornton review the macroeconomic effect of deficit spending. The authors discuss the ways in which macroeconomists have asserted that society benefits from deficit spending, citing arguments for and against each. They observe that the once-common view that the market economy is prone to extended periods of unemployment and below-potential output because of the private sector’s inability to generate sufficient aggregate demand has given way to the view that deficit spending can have little permanent effect on output or employment. This means that the principal benefits from deficit spending come from using it to stabilize output around this policy invariant path. Chrystal and Thornton note that the information policymakers need to use deficit spending to stabilize output is extensive; moreover, the evidence that deficit spending has succeeded in stabilizing output is weak.