THE IMPACT OF BUDGET DEFICITS IN THE INTERWAR PERIOD

Five- and six-variable vector autoregressions are estimated, and the effects of deficits on interest rates, money, production, and prices are analyzed through the computation of likelihood ratio tests, variance decompositions and impulse response functions. A Monte Carlo simulation technique is used to estimate standard errors. Systems are analyzed for two alternative time periods that have been used to represent the interwar period. The study concludes that July 1922-June 1938 is the more appropriate period for analyzing deficits. Our results indicate that deficits have no major effects on the non-fiscal variables in this period. © 1991.