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September/October 1990, 
Vol. 72, No. 5
Posted 1990-09-01

Do Government Deficits Matter?

Daniel L. Thornton considers the question: "Do Government Deficits Matter?” Thornton discusses alternative views of the effects of deficits on the economy, interest rates, the trade deficit and the like, pointing out the rationale behind the conventional views, for example, that government deficits cause real interest rates to be high or the trade deficit to be large. He then discusses the alternative view, called Ricardian Equivalence, that deficits don’t matter. Finally, he presents some evidence on the relationship between government deficits and various economic variables using annual data for 16 OECD countries for the period 1975-86. By and large, his results, consistent with most U.S. time-series studies, support the Ricardian view.