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The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and a

This paper summarizes recent empirical studies on the effects of budget deficits on interest rates, investment, and trade deficits in the United States. It also reports new evidence on the effects of budget deficits on investment and on trade deficits for the 1980s. The results support the view that budget deficits crowd out domestic investment and increase trade deficits.

Intro -- FEDERAL DEFICIT REDUCTION: CHOICES AND CONSIDERATIONS -- FEDERAL DEFICIT REDUCTIONCHOICES AND CONSIDERATIONS -- CONTENTS -- PREFACE -- Chapter 1 CHOICES FOR DEFICIT REDUCTION -- SUMMARY -- INTRODUCTION -- HOW BIG ARE PROJECTED U.S. DEFICITS AND DEBT? -- WHAT FACTORS ARE PUTTING INCREASING PRESSUREON THE BUDGET? -- Spending for Social Security and Major Health Care Programs -- Other Noninterest Spending -- Net Interest and Total Spending -- Revenues -- WHAT ARE THE CONSEQUENCES OFRISING FEDERAL DEBT? -- WHAT KINDS OF POLICY CHANGES COULD LEADTO A MORE SUSTAINABLE BUDGETARY PATH? -- Possible Targets for Deficit Reduction -- Overview of Options to Reduce the Deficit -- Options That Would Reduce Mandatory Spending -- Options That Would Reduce Discretionary Spending -- Options That Would Increase Revenues -- WHAT CRITERIA MIGHT BE USED TO EVALUATE POLICYCHANGES? -- How Big Would the Government Be? -- How Would the Government's Resources Be Allocated? -- How Much Would Deficits Be Reduced in the Next 10 Years? -- How Much Would Deficits Be Reduced in the Long Term? -- What Would the Economic Impact Be in the Short Term? -- What Would the Economic Impact Be in the Medium and LongTerm? -- Who Would Bear the Burden of Proposed Changes in Tax andSpending Policies? -- APPENDIX: ARE FISCAL RULES A USEFUL TOOL FORACHIEVING BUDGETARY GOALS? -- Types of Fiscal Rules -- Experiences with Fiscal Rules at the Federal Level in the UnitedStates -- Experiences with Selected Fiscal Rules in Europe -- End Notes -- End Notes for Appendix -- Chapter 2 CONFRONTING THE NATION'S FISCALPOLICY CHALLENGES. STATEMENT OFDOUGLAS W. ELMENDORF, DIRECTOR,CONGRESSIONAL BUDGET OFFICE.HEARING ON ''THE HISTORY AND DRIVERSOF OUR NATION'S DEBT AND ITS THREATS'' -- SUMMARY -- The Economic Outlook -- The Budget Outlook -- Fiscal Policy Choices -- The Magnitude of Deficit Reduction