National Debt and Its Effects on Several Other Variables: An Econometric Study of the United States

Abstract

This paper uses a neoclassical open economy general equilibrium model to determine the effects of the budget deficit and national debt on some key domestic variables while examining the interdependence and repercussion effects between the U.S. economy and the rest of the world. The empirical results show that the budget deficit has a significant effect on both prices and the current account and that the international debt has a similar effect on consumption and saving. Foreign interest rate and foreign real income affect almost every variable in the United States. In the long run, the deficits might have negative effects on the U.S. economy and redistribution effects between generations.