Yves Rabeau

A simulation model of macroeconomic effects of deficit

Abstract In this paper, we present a closed-economy version of a macroeconomic simulation model. We use this model to analyze the effect of an increase in the government deficit on the short-run behavior of the economy and on its steady-state level. As long as households do not fully discount future taxes, we find that there is a significant resource crowding-out effect associated with an increase in deficit in the long run. These results suggest that the short-run gains from stabilization measures are small compared to the negative effect on potential output.