Journal Article

Deficit-financed tax cuts and interest rates

Abstract: Why do proposals to lower taxes often meet with opposition in Congress. One argument is that lowering taxes without an equivalent fall in government spending may lead to future budget deficits, which will translate into higher long-term interest rates and a lower level of income. Sylvain Leduc discusses the theoretical arguments under which budget deficits lead to higher interest rates. He also surveys empirical studies that used data on expected budget deficits to document the possibility that increases in future budget deficits are associated with higher real long-term interest rates.

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Business Review

Publication Date: 2004

Issue: Q2

Pages: 30-37