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Is the US Fiscal Deficit Sustainable? A Fractionally Integrated and Cointegrated Approach

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  • Juncal Cunado

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Luis A. Gil-Alana

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Fernando Pérez de Gracia

    ()
    (School of Economics and Business Administration, University of Navarra)

Abstract

The sustainability of fiscal deficits has received in recent years increasing attention from economists. Empirical work has concentrated on both the univariate properties of debt and the cointegration properties of public revenues and expenditures. In this paper, we examine if sustainability of the US fiscal deficit holds by means of studying the univariate properties of the difference between public revenues and expenditures. However, instead of using classical approaches based on I(1) or I(0) integration techniques, we use a methodology based on fractional processes. The results show that the public deficit in the US is an I(d) process with d slightly smaller than 1, implying that fiscal deficit is mean reverting, and thus, sustainable, though the adjustment process towards equilibrium will take a very long time.

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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 03/02.

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Length: 30 pages pages
Date of creation: May 2002
Date of revision:
Publication status: Published, Journal of Economics and Business, 2004, vol. 56(6): pp. 501-526
Handle: RePEc:una:unccee:wp0302

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Web page: http://www.unav.es/facultad/econom

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