Date Added: Dec 2009
This paper explores how the U.S. budget deficit affects U.S. economic growth. Time-series data for the 1973-2004 period is applied to a simultaneous equation model to estimate the various direct and indirect effects of budget deficits on growth. The results indicate that, ceteris paribus, an increase in budget deficits slows growth. However, the "Twin" current account deficits, which the model shows tend to accompany budget deficits, increase growth. Hence, the overall relationship between budget deficits and economic growth is ambiguous.