The International Transmission of Fiscal Expenditures and Budget Deficits in the World Economy

This paper deals with the international transmission of the effects of fiscal expenditures and budget deficits. One of the major sources of recent friction between Europeans and Americans has been the interpretation of the economic implications of US budget deficits. Theorists and policymakers on both sides of the Atlantic have differed in the analysis of the role of budget deficits in affecting key macroeconomic aggregates. Specifically, some have argued that large budget deficits are responsible for the recently observed high real rates of interest while others have claimed that budget deficits cannot be blamed for these real rates. The latter group claimed that theory does not predict a clear-cut relation between budget deficits and rates of interest and that the empirical record itself is very weak.