Government budget deficits and trade deficits: are present value constraints satisfied in long-term data?

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Government budget deficits and trade deficits: are present value constraints satisfied in long-term data?

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Shaghil Ahmed
John H. Rogers

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John H. Rogers

Abstract

We undertake tests of whether long term data from the U.S. and U.K. are consistent with the intertemporal government budget constraint and the intertemporal external borrowing constraint being satisfied in expected value terms, both individually and simultaneously. An historical perspective is appropriate for focusing on whether the present value constraints (PVCs) continue to hold in the face of unusual events, such as the outbreak of wars, that cause a structural break in the short-run dynamic behavior of the variables. This provides a very strong test of whether intertemporal budget constraints are satisfied. Our main results are: (i) the PVCs hold over the whole sample period; and (ii) the data are also consistent with the hypothesis that the PVCs continue to hold following events which cause a structural break in the short-run dynamics.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 494.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:494

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Article
- Ahmed, Shaghil & Rogers, John H., 1995. "Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 351-374, November. [Downloadable!] (restricted)
Paper
- Ahmed, S. & Rogers, J.H., 1993. "Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?," Papers 5-93-6, Pennsylvania State - Department of Economics.

References listed on IDEAS
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Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 3-91, Wharton School Rodney L. White Center for Financial Research.
Other versions:
- Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
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Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August. [Downloadable!] (restricted)
Other versions:
- David W. Wilcox, 1987. "The substainability of government deficits: implications of the present- value borrowing constraint," Working Paper Series / Economic Activity Section 77, Board of Governors of the Federal Reserve System (U.S.).
Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
Other versions:
- James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
Bohn, H., 1991. "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Weiss Center Working Papers 3-91, Wharton School - Weiss Center for International Financial Research.
Other versions:
- Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers 28-89, Wharton School Rodney L. White Center for Financial Research.
- 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)
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)
Other versions:
- James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Oxford University Press, vol. 29(3), pages 429-45, July.
Trehan, Bharat & Walsh, Carl E, 1991. "Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 206-23, May. [Downloadable!] (restricted)
Other versions:
- 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.
Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November. [Downloadable!] (restricted)
Other versions:
- Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May. [Downloadable!] (restricted)
Husted, Steven, 1992. "The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 159-66, February. [Downloadable!] (restricted)
Kremers, Jeroen J. M., 1989. "U.S. Federal indebtedness and the conduct of fiscal policy," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 219-238, March. [Downloadable!] (restricted)

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