The macroeconomic impacts of government debt: An empirical analysis of the 1980s and 1990s

This study examines the macroeconomic impacts of government debt. Unlike previous studies, the current study restricts the estimation period to the 1980s and 1990s. The analysis is conducted using variance decompositions and impulse response functions derived from a vector autoregressive model. The results presented here support an extreme form of the Ricardian equivalence hypothesis. In this view, wealth falls as government debt rises. Because wealth falls as government debt rises, an increase in government debt leads to decreases in interest rates, output, and the price level.This work was supported by a grant from the Faculty Research and Creative Activities Support Fund of Western Michigan University. The author wishes to thank Nancy S. Barrett, James S. Fackler, W. Douglas McMillin, Susan Pozo, and Paul D. Thistle for comments and suggestions.