Re: NYTimes.com Article: A Fiscal Train Wreck

["Forstater, Mathew" <ForstaterM@xxxxxxxx>]

See Paul Evans, 1985, "Do Large Deficits Produce High Interest Rates?"
American Economic Review, Vol. 75, No. 1. (Mar., 1985), pp. 68-87.

Evans looks at three periods in U.S. history (Civil War, WWI, WWII) as well as the post WWII period (up to the time of his paper, obviously) and shows that there is really no evidence at all supporting the idea that deficits cause high interest rates. Eisner used to always say that if anything the opposite may be true--high interest rates cause higher deficits--but there doesn't seem to even be a correlation at all.  Of course, Evans--elsewhere, if not in that article--put forward the view that Ricardian equivalence may explain his evidence!

-----Original Message-----
From: pdavidso [mailto:pdavidso@xxxxxxx]
Sent: Monday, March 17, 2003 9:00 AM
To: Javier Finkman
Cc: pkt@xxxxxxxxxxxxxxxx
Subject: Re: NYTimes.com Article: A Fiscal Train Wreck

>===== Original Message From Javier Finkman <finkman@xxxxxxxxxxxxx> =====
>Essentially, Mosler reply to Krugman´s article disputes how interest rates
would react to higher fiscal deficits presumably financed with debt. The rest
follows from the different conclusion about rates behaviour (for both sides).
>
>Krugman was too mechanical in his reasoning: rates could go up but not
necessarily. The same applies to Mosler: rates could stay down but not
necesarily. None of them had provided the dynamics (short pieces not
incompetence, obviously).

While all your statistics is interesting, you miss Warren Mosler's point --
namely that the Federal Reserve can always control short-term interest rates--
and if it wanted to deal with longer term government debt -- all interest
rates.

All you have to do is look at World War IUI whewre Roosevelt fought the war
with very low interest rates -- despite annual federal government deficits
that reached over 40% of the GNP at the time.


Again today is a much mor complex economy and with free international capital
mobility the problem for the Fed can be somewhat more difficult than in the
1940s -- but it is not beyond the abaility of the US government to handle such
problems.

Paul
>

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
phone # (561)369-1951; fax #(561)369-1951;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html