Sustainability of Budget Deficits
This paper examines theoretical models that underpin studies on gsustainability of budget deficits h, which have been drawing interest in recent years, and also explains methods of empirical tests. The paper starts with a discussion on the intertemporal government budget constraint in a certainty model and then expands the discussion to under uncertainty. Under uncertainty, the issue of whether or not Ponzi schemes are feasible in a dynamically efficient economy is theoretically important. When the economy is dynamically efficient in the gstrict h sense, Ponzi schemes are infeasible. Although it is possible for the risk-free interest rate to be lower than the economic growth rate on average under sufficient uncertainty, it is important to ensure that Ponzi schemes are infeasible even in such a case. Empirical research on fiscal sustainability started with a study by Hamilton and Flavin, which sought to examine whether the present value borrowing constraint is satisfied. Later, the premise of their analysis (stationarity of primary surplus) was disputed by Wilcox and by Trehan and Walsh, and different tests were proposed. In addition, Bohn proposed another test from a different perspective. This paper explains those methods and points out their problems.
Volume (Year): 9 (2013)
Issue (Month): 4 (September)
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