Sustainability of the Deficit Process with Structural Shifts
This paper discusses the condition for deficit sustainability and searches for shifts in the structure of U.S. deficit policy. The author shows that, contrary to the current literature, cointegration between revenues and expenditures inclusive of debt payment is not a necessary but a sufficient condition for a strict interpretation of deficit sustainability. The necessary and sufficient condition is that debt grow slower than the borrowing rate. Using tests that search for shifts in the rank of the cointegrating matrix, the author shows that the deficit is sustainable despite the failure of cointegration in the 1980s.
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Volume (Year): 13 (1995)
Issue (Month): 4 (October)
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