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. JEL Nos. E6, H6

Using data from the PSID, we find that household income has become noticeably more volatile during the past thirty years. We estimate that the standard deviation of percent changes in household income rose one-fourth between the early 1970s and early 2000s. This widening in the distribution of percent changes is concentrated in the tails of the distribution, and especially in the lower tail: Changes between the 25 th and 75 th percentiles are almost the same size now as thirty years ago, but changes at the 10 th percentile look substantially more negative. The boost in volatility occurred throughout the 1970s, 1980s, and 1990s, albeit not at a steady pace. Households' labor earnings and transfer payments have both become more volatile over time.

Bridges, and Adam McGlashan for research assistance. An appendix available from the authors includes tables and figures not included in the published version of the paper as well as a brief review of the evidence regarding the leading hypotheses for the moderation in economic activity. The views expressed in the paper are our own and not necessarily those of the Federal Reserve Board or other members of its staff. 2 Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?

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