Budget Deficits, National Saving, and Interest Rates

ECONOMIC ANALYSIS OF the aggregate effects of fiscal policy dates back at least to the work of David Ricardo. Modern academic interest was reinvigorated by the work of Robert Barro and others and by the emergence of large U.S. federal budget deficits in the 1980s and early 1990s.1 The result was a substantial amount of research, which is summarized in several excellent surveys.2 The rapid but short-lived transition to budget surpluses in the late 1990s, followed by the sharp reversal in budget outcomes since 2000, has raised interest in this topic again.