OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Eliminating the U.S. Federal Budget Deficit by 1993

The Interaction of Monetary and Fiscal Policy

This paper uses the OECD's economic model, INTERLINK, to examine the consequences of eliminating the U.S. federal government deficit. Such action could lead to either lower real interest rates, lower inflation rates or a smaller current account deficit, depending on the stance of monetary policy. The elimination of the U.S. Federal deficit over the medium term could significantly lower the U.S. inflation rate and improve the current account deficit, if nominal interest rates were held constant in the face of falling inflation rates. In the absence of a reduction in the fiscal deficit, a significant increase in interest rates would be necessary to achieve the same reduction in the inflation rate. If, however, policy tightening is not necessary to contain inflation, a reduction in the fiscal deficit might be accompanied by a fall in nominal and real interest rates. In this case, a reduction in the fiscal deficit would not necessarily result in an improvement in the current account ...


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