Effect of Expected Future Government Deficits on Current Economic Activity
NBER Working Paper No. 1293
This paper considers that possibility that expected future government deficits directly affect economic decisions, in particular the decisions of the Federal Reserve. Some evidence is presented in Section II that indicates that the behavior of the Fed may be influenced by expected future deficits.The economic consequences of this behavior are examined in Section III. The results in this section show that fiscal policy is less effective if the Fed responds to expected future deficits than otherwise. Quantitative estimates of the differences in fiscal-policy effects are presented.