This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow.

This paper uses news reports about two deficit-reduction laws of the past decade to identify days when expected fiscal policy clearly became more or less expansionary. The paper also proposes a technique for identifying whether the real interest rate increased or decreased on those days, based on changes in the nominal interest rate, the exchange rate, commodity prices, and stock prices. As economic theory predicts, higher expected government spending and budget deficits raised real interest rates and the value of the dollar, while lower expected spending and deficits reduced real rates and the value of the dollar.