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Testing for fiscal sustainability: New evidence from the G-7 and some European countries

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  • Chen, Shyh-Wei

Abstract

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt–GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt–GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt–GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration.

Suggested Citation

  • Chen, Shyh-Wei, 2014. "Testing for fiscal sustainability: New evidence from the G-7 and some European countries," Economic Modelling, Elsevier, vol. 37(C), pages 1-15.
  • Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:1-15
    DOI: 10.1016/j.econmod.2013.10.024
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    More about this item

    Keywords

    Debt; Sustainability; Threshold; Unit root;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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