Deficits,expected deficits,financial markets,and the economy |
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| Institution: | 1. Rand Merchant Bank, 1 Merchant Place, Cnr Fredman Drive & Rivonia Road, Sandton 2196, South Africa;2. Research Associate, Faculty of Economics and Financial Sciences, Department of Finance and Investment Management, University of Johannesburg, PO Box 524, Aucklandpark, South Africa;3. Department of Finance and Investment Management, University of Johannesburg, Aucklandpark 2006, South Africa;1. Dip. Political Science, University of Naples Federico II, Naples, Italy;2. Dip. Statistics, University of Rome “La Sapienza”, Rome, Italy;1. Ribeirão Preto School of Economics, Administration and Accounting (FEA-RP), University of São Paulo (USP), Av. Bandeirantes, 3900, Ribeirão Preto, SP CEP: 14040-900, Brazil;2. School of Economics, Administration and Accounting (FEA), University of São Paulo (USP), Av. Prof. Luciano Gualberto, 908 – Prédio 3, São Paulo, SP CEP: 05508-010, Brazil;1. Banca d’Italia, Via Nazionale, 91, 00184 Rome, Italy;2. Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland |
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| Abstract: | This paper assesses the implications of U.S. budget and current account deficits for financial and economic stability. The primary focus is on the behavior of interest rates in response to deficits, then effects on the economy through the financial system. The paper argues, and shows with empirical evidence, including from a large-scale econometric model, that expected, but not realized, budget deficits affect interest rates. Under certain circumstances, particularly near full employment, sustained budget and current account deficits can lead to financial disarray and a severely constrained economy. |
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