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A new test for deficit sustainability and its application to US data

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  • Hatzinikolaou, Dimitris
  • Simos, Theodore

Abstract

In this paper, we define deficit sustainability by requiring formally that both the discounted debt vanish asymptotically and the undiscounted debt be bounded. Thus, a new necessary condition and a new testing procedure emerge. We propose a new test statistic and prove that its limiting distribution is standard normal, N(0, 1). Its finite- sample distribution differs from N(0, 1), however, mainly because it has fat tails, so we derive empirical critical values using simulations. Using the new test and United States (US) quarterly data, the conclusions of three earlier papers that fail to reject the sustainability of the US budget or current-account deficit are reversed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45393.

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Date of creation: 14 Aug 2011
Date of revision: 17 Jan 2012
Handle: RePEc:pra:mprapa:45393

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Keywords: Undiscounted debt; budget; current account; sustainable;

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Cited by:
  1. Dimitris Hatzinikolaou & Theodore Simos & Agathi Tsoka, 2013. "Is the US current-account deficit sustainable? The importance of structural breaks in testing sustainability," Economics Bulletin, AccessEcon, vol. 33(4), pages 2817-2827.

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