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Debt and Deficits: Fiscal Analysis with Stationary Ratios

Author

Listed:
  • John Y. Campbell

    (Harvard University; NBER)

  • Can Gao

    (University of St. Gallen; Swiss Finance Institute)

  • Ian Martin

    (London School of Economics)

Abstract

We introduce a new measure of a government’s fiscal position that exploits cointegrating relationships among fiscal variables and output. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that—unlike the debt-GDP ratio—is stationary in the US and the UK since World War II. Fiscal deterioration forecasts a long-run decline in spending rather than increased tax revenue or low returns for bondholders. Fiscal adjustment to tax and spending shocks occurs through mean-reversion in tax and spending growth, with a negligible contribution from debt returns.

Suggested Citation

  • John Y. Campbell & Can Gao & Ian Martin, 2023. "Debt and Deficits: Fiscal Analysis with Stationary Ratios," Swiss Finance Institute Research Paper Series 23-101, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp23101
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    Keywords

    Debt; deficits; primary surplus; stationarity; cointegration;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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