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Dynamics between the budget deficit and the government debt in the United States: a nonlinear analysis

Author

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  • Ahmed Haydory Akbar

    (Missouri State University, Department of Economics, 901 S National Avenue, Springfield, 65897, MO, USA)

Abstract

This paper empirically investigates the dynamics between budget deficit and government debt in the U.S. using two different measures of the budget deficit: the current budget deficit and cyclically-adjusted budget deficit. A threshold Vector autoregression (VAR) model is estimated to explore the dynamics in different regimes using quarterly data from 1947:Q1 to 2017:Q3. The specification test rejects a linear VAR model against the threshold VAR. When we use the current budget deficit, regime 1 resemble governments prioritize minimizing budget deficit and debt, whereas, regime 2 resemble otherwise. When we use the cyclically adjusted budget deficit, regime 1 resemble economic expansions, whereas, regime 2 resemble recessions. The impulse responses show evidence of asymmetry and counter-cyclicality. The impulse responses also indicate that an increase in the debt dictate the government’s response towards minimizing the budget deficit and tend to prioritize budget deficit less when the economy expands.

Suggested Citation

  • Ahmed Haydory Akbar, 2020. "Dynamics between the budget deficit and the government debt in the United States: a nonlinear analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(3), pages 93-109, June.
    • Handle: RePEc:bpj:sndecm:v:25:y:2020:i:3:p:93-109:n:5
    DOI: 10.1515/snde-2018-0087
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    More about this item

    Keywords

    budget deficit; government debt; impulse responses; output gap; threshold VAR; E31; E32; E37; E61; E63;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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