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Feedback covariates unit root tests : an application to the sustainability of fiscal policy

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Author Info
Fève, Patrick
Hénin, Pierre-Yves
Jolivaldt, Philippe

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Abstract

Sustainability tests often ignore the joint dynamics of stock and flow variables. This paper shows that such a practice leads to inappropriate statistical inference, and that taking into account this joint dynamics when testing for unit root induces large power gains. This paper introduces a new statistics denoted FADF (Feedback augmented Dickey Fuller), which fully combines feedback effects and covariates. The paper derives the limit distribution of the test statistic and comments on the asymptotic power functions. A simulation study and an empirical application based on US public debt sustainability illustrate the potential of this approach.

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Publisher Info
Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Couverture Orange) with number 9810.

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Length: 36 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:cpm:cepmap:9810

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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    Other versions:
  2. Bharat Trehan & Carl E. Walsh, 1987. "Common trends, the government's budget constraint, and revenue smoothing," Working Papers in Applied Economic Theory 87-11, Federal Reserve Bank of San Francisco.
    Other versions:
  3. Bohn, Henning, 1991. "Budget balance through revenue or spending adjustments? : Some historical evidence for the United States," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 333-359, June. [Downloadable!] (restricted)
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  4. Davidson, Russell & MacKinnon, James G, 1998. "Graphical Methods for Investigating the Size and Power of Hypothesis Tests," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 66(1), pages 1-26, January.
    Other versions:
  5. Lawrence J. Christiano & Martin Eichenbaum, 1989. "Unit Roots in Real GNP: Do We Know, and Do We Care?," NBER Working Papers 3130, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Smith, Gregor W & Zin, Stanley E, 1991. "Persistent Deficits and the Market Value of Government Debt," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(1), pages 31-44, Jan.-Marc. [Downloadable!] (restricted)
  7. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
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    Other versions:
  10. Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February. [Downloadable!] (restricted)
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  11. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
  13. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October. [Downloadable!]
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  14. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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  16. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Oxford University Press, vol. 29(3), pages 429-45, July.
  17. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation, Yale University, revised Apr 1989. [Downloadable!]
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  20. repec:cup:etheor:v:11:y:1995:i:5:p:1131-47 is not listed on IDEAS
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