The Macroeconomic Effects of Government Debt on Capital Formation in the United States: An Empirical Investigation

In this paper we empirically examine the effects of government debt on interest rate, price, output and capital formation in the USA during the post-war period. Using co-integration methodology supplemented with variance decompositions and impulse response functions, the study found a long-run equilibrium as well as a strong feedback relationship between real debt and real capital formation. The results also indicate that public debt increases inflation with adverse effects on capital formation and real output which broadly support the views of 'monetarists', and partially of the neo-Ricardian economists.