TY  - JOUR
AU  - Hamilton,James D.
AU  - Flavin,Marjorie A.
TI  - On the Limitations of Government Borrowing:  A Framework for Empirical Testing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1632
PY  - 1985
Y2  - June 1985
UR  - http://www.nber.org/papers/w1632
L1  - http://www.nber.org/papers/w1632.pdf
N1  - Author contact info:
James D. Hamilton
Department of Economics, 0508
University of California, San Diego
9500 Gilman Drive
La Jolla, CA 92093-0508
Tel: 858/534-5986
Fax: 858/534-7040
E-Mail: jhamilton@ucsd.edu

Marjorie Flavin
Department of Economics, 0508
9500 Gilman Drive
University of California, San Diego
La Jolla, CA 92093-0508
Tel: 619/534-4649
Fax: 619/534-7040
E-Mail: mflavin@ucsd.edu
AB  - This paper seeks to distinguish empirically between two views on the limitations of government borrowing. According to one view, nothing precludes the government from running a permanent budget deficit, paying interest due on the growing debt load simply by issuing new debt, An alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms. We show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals. Empirical tests which have been developed for this economic question lead us to conclude that postwar U.S. deficits are largely consistent with the proposition that the government budget must be balanced in present-value terms.
ER  -