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Periodically expanding discounted debt: a threat to fiscal policy sustainability?

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  • Troy Davig

    (Department of Economics, The College of William and Mary, Williamsburg, USA)

Abstract

This paper models the behaviour of discounted US debt using a Markov-switching time series model. The significance of modelling fiscal policy within this framework derives from the implications it has for long-term sustainability. The two-regime framework used in this paper identifies periods where the present value of US Federal debt is expanding versus periods when it is collapsing. Using an updated data series from Hamilton and Flavin (1986), a test is conducted to establish if the expanding periods pose a threat to the long-run sustainability of fiscal policy. For the USA, it is found that they do not. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.807
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File URL: http://qed.econ.queensu.ca:80/jae/2005-v20.7/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 20 (2005)
Issue (Month): 7 ()
Pages: 829-840

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Handle: RePEc:jae:japmet:v:20:y:2005:i:7:p:829-840

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  1. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  2. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-19, September.
  3. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
  4. Haug, Alfred A, 1991. "Cointegration and Government Borrowing Constraints: Evidence for the United States," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(1), pages 97-101, January.
  5. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  6. McCallum, Bennett T, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 123-35, February.
  7. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
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