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On Testing Sustainability of Government Deficits in a Stochastic Environment

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  • Bohn, H.

Abstract

In recent years, a number of empirical studies have examined the long-run sustainability of U.S. debt policy. Some studies conclude that U.S. fiscal policy has been sustainable, others disagree. This paper argues that the issue should be reexamined, because the traditional sustainability test explicitly or implicitly assume that the rate of return on government debt is "on average" above the rate of economic growth, a condition that does not hold for historical U.S. data. The paper derives and implements a new test for sustainability hat does not rely on a particular relation between interest rates and growth rates. I conclude that U.S. fiscal policy has historically satisfied a sufficient condition for sustainability.

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Bibliographic Info

Paper provided by Wharton School - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 19-91.

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Length: 23 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:pennif:19-91

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Keywords: government policy ; debt ; growth rate ; interest rate;

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Cited by:
  1. Lehment, Harmen & Scheide, Joachim, 1992. "Die europäische Wirtschafts- und Währungsunion : Probleme des Übergangs," Open Access Publications from Kiel Institute for the World Economy 1513, Kiel Institute for the World Economy (IfW).
  2. Michael Dotsey & Ching Sheng Mo, 1994. "The effects of fiscal policy in a neoclassical growth model," Working Paper 94-03, Federal Reserve Bank of Richmond.

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