Budget deficits and real interest rates: Updated empirical evidence on causality

Using error-correction model (ECM) estimation, the paper empirically examines the causality relationship between the federal government budget deficit and the ex ante real interest rate yield on high grade long term tax free municipal bonds in the U.S. To clarify this deficit or interest rate relationship, the budget deficit is measured by the primary budget deficit, which excludes net interest payments by the Treasury. In a model that includes federal personal income tax rates and net international capital flows, as well as money supply growth, the ECM estimates strongly suggest a bi-directional relationship between the primary budget deficit and the ex ante real interest rate yield. Budget deficits apparently do matter! William Simon's concerns were justified.The author is indebted to P. A. V. B. Swamy for ideas and helpful suggestions and Will Perry for data assembly and processing.     

IS EQUALITY OF OPPORTUNITY POLITICALLY FEASIBLE?

We develop a political-economy model where the amount of education subsidies is determined in a majority vote and spending is financed by revenues from taxation. Our analysis demonstrates that limiting the extent of subsidization and thus excluding the poor from gaining enough education can be a political equilibrium. Despite being the main beneficiaries of subsidies, the politically decisive middle class hesitates to extend monetary benefits, since improved access to higher education diminishes the return to education. Moreover, a non-monotone relation between inequality and the extent of redistribution through tax-financed educational subsidies obtains.     

Reduced Form Auctions Revisited

This note uses the Theorem of the Alternative to prove new results on the implementability of general, asymmetric auctions, and to provide simpler proofs of known results for symmetric auctions. The tradeoff is that type spaces are taken to be finite.