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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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Suggested Citation

  • Bohn, H., 1991. "On Testing Sustainability of Government Deficits in a Stochastic Environment," Weiss Center Working Papers 19-91, Wharton School - Weiss Center for International Financial Research.
    • Handle: RePEc:fth:pennif:19-91
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    Cited by:

    1. 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.
    2. 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.
    3. 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 Kiel).

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