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Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition

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  • Tsuchiya, Yoichi

Abstract

This study evaluates directional accuracy of long-term interest rate and nominal GDP growth forecasts made by the U.S. Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and private forecasters by applying a recently developed market-timing test. This study also investigates whether these forecasts provide useful indicators of the well-known Domar's fiscal sustainability condition and whether directional accuracy differs between ruling parties and the state of the economy. This study finds that the CBO forecast for Domar's condition is useful with a two-year horizon, whereas OMB and private forecasts are only useful with a one-year horizon. The directional accuracy of the forecasts does not differ between expansion and recession.

Suggested Citation

  • Tsuchiya, Yoichi, 2016. "Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 189-201.
    • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:189-201
    DOI: 10.1016/j.iref.2015.08.012
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    More about this item

    Keywords

    Government forecasts; Debt sustainability; Forecast evaluation; Market-timing test; Nonparametric methods;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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