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Persistent Deficits and the Market Value of Government Debt

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Author Info
Smith, Gregor W
Zin, Stanley E

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Abstract

This paper investigates whether postwar Canadian public financial policy satisfies a borrowing constraint. Direct tests of the present-value relation suggested by this constraint shed light on the sustainability of current policy. We examine monthly data on Canadian federal government finances using tests for cointegration. The finding is that the joint behavior of real debt and real surpluses is inconsistent with intertemporal budget balance for the government. One interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt. Alternatively, bondholders may expect the government to finance future interest payments from a source other than primary surpluses, e.g. the sale of physical assets. Copyright 1991 by John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 6 (1991)
Issue (Month): 1 (Jan.-March)
Pages: 31-44
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Handle: RePEc:jae:japmet:v:6:y:1991:i:1:p:31-44

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  1. Óscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, . "Us Deficit Sustainability Revisited: A Multiple Structural Change Approach," Working Papers 19-05 Classification-JEL , Instituto de Estudios Fiscales. [Downloadable!]
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  2. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Is the Budget Deficit Sustainable when Fiscal Policy is nonlinear? The Case of Spain, 1961-2001," Economic Working Papers at Centro de Estudios Andaluces E2003/32, Centro de Estudios Andaluces. [Downloadable!]
  3. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers 2000/12, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  4. Francisco De Castro & Pablo Hernández De Cos, 2002. "On the sustainability of the Spanish public budget performance," Hacienda Pública Española, IEF, vol. 160(1), pages 9-28, march. [Downloadable!]
  5. Merih Uctum & Michael Wickens, 1996. "Debt and deficit ceilings, and sustainability of fiscal policies: an intertemporal analysis," Research Paper 9615, Federal Reserve Bank of New York. [Downloadable!]
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  6. Fève, Patrick & Hénin, Pierre-Yves & Jolivaldt, Philippe, 1998. "Feedback covariates unit root tests : an application to the sustainability of fiscal policy," CEPREMAP Working Papers (Couverture Orange) 9810, CEPREMAP. [Downloadable!]
  7. Antonio Afonso, 2004. "Fiscal Sustainability: the Unpleasant European Case," Money Macro and Finance (MMF) Research Group Conference 2004 57, Money Macro and Finance Research Group. [Downloadable!]
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  8. António Afonso & Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2009. "Assessing Long-Term Fiscal Developments: a New Approach," Working Papers 2009/19, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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  9. Buiter, Willem H & Sibert, Anne, 2006. "Deflationary Bubbles," CEPR Discussion Papers 5637, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Michael Artis & Massimiliano Marcellino, . "Fiscal Solvency and Fiscal Forecasting in Europe," Working Papers 142, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  11. Ricardo M. Sousa & António Afonso, 2009. "Assessing Long-Term Fiscal Developments: Evidence from Portugal," NIPE Working Papers 1/2009, NIPE - Universidade do Minho. [Downloadable!]
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  12. Francisco de Castro & José M. González-Páramo & Pablo Hernández de Cos, 2001. "Evaluating the dynamics of fiscal policy in Spain: patterns of interdependence and consistency of public expenditure and revenues," Banco de España Working Papers 0103, Banco de España. [Downloadable!]
  13. Evan Lau & Ahmad Zubaidi Baharumshah, 2005. "Assessing The Mean Reversion Behavior Of Fiscal Policy: The Case Of Asian Countries," Macroeconomics 0504002, EconWPA. [Downloadable!]
  14. M. Ryan Haley & Harry J. Paarsch, 2004. "The stochastic implications of rent maximization: an application to stumpage rates for timber in British Columbia," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 25-48. [Downloadable!]
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