Journal of Economic Perspectiues-Volume 3, Number 2-Spring 1989-Pages 37-54 The Ricardian Approach to Budget Deficits Robert j. Barro n recent years there has been a lot of discussion about U. S. budget deficits. Many economists and other observers have viewed these deficits as harmful to the U. S and world economies. The supposed harmful effects include high real int rates, low saving, low rates of economic growth, large current-account deficits in the United States and other countries with large budget deficits, and either a high or low dollar(depending apparently on the time period). This crisis scenario has been hard to maintain along with the robust performance of the U.S. economy since late 1982. This performance features high average growth rates of real GNP, declining unemploy ment, much lower inflation, a sharp decrease in nominal interest rates and some decline in expected real interest rates, high values of real investment expenditures, and (until October 1987)a dramatic boom in the stock market. Persistent budget deficits have increased economists' interest in theories and evidence about fiscal policy. At the same time, the conflict between standard predi tions and actual outcomes in the U.S. economy has, I think, increased economist to consider approaches that depart from the standard paper I will focus on the alternative theory that is associated with the name of David Ricardo The Standard Model of Budget Deficits Before developing the Ricardian approach, I will sketch the standard model. The starting point is the assumption that the substitution of a budget deficit for current a Robert Barro is Professor of Economics, Harvard Uniuersity, Cambridge, Massachusetts, search Associate, National Bureau of Economic Research, Cambridge, Massachusetts; Research Associate, Rochester Center for Economic Research, University of Rochester, Rochester, New york