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Deadweight Losses and the Saving Response to a Deficit

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  • Fremling, Gertrud M
  • Lott, John R, Jr

Abstract

Several recent empirical studies have challenged the conventional wisdom that deficits cause a higher interest rate. Many economists are, however, critical of the seemingly implied theoretical justification--that every individual fully recognizes the size of the deficit and the extent to which it increases future tax liabilities. This paper demonstrates that far weaker information assumptions are needed to obtain an aggregate savings response equal to the deficit: a reallocation of deadweight losses causes Ricardians to save more than their share of the deficit to keep consumption unaffected, allowing for a substantial fraction of Keynesians who save less than their share. Copyright 1989 by Oxford University Press.

Suggested Citation

  • Fremling, Gertrud M & Lott, John R, Jr, 1989. "Deadweight Losses and the Saving Response to a Deficit," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 117-129, January.
    • Handle: RePEc:oup:ecinqu:v:27:y:1989:i:1:p:117-29
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    Cited by:

    1. Karen Smith Conway, 1999. "Are Workers “Ricardian†? Estimating the Labor Supply Effects of State Fiscal Policy," Public Finance Review, , vol. 27(2), pages 160-193, March.
    2. Karen Smith Conway, 1994. "Reconsidering the Effects of Fiscal Policy On Private Sector Behavior: a Unifying View of Neutrality," Public Finance Review, , vol. 22(2), pages 195-221, April.

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