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Assessing effective sustainability of fiscal policy within the G-7

  • Fève, Patrick
  • Hénin, Pierre-Yves

This paper introduces a new unit root test, using "Feedback Covariates", in order to test for sustainability of fiscal policy within the G-7.Non-sustainability is considered as the null hypothesis of both a unit root in the debt process and the nullity of a deficit correction in response to inherited debt. We characterize the distribution of the FADF (Feedback Augmented Dickey-Fuller) statistics under both the null and the near unit root alternative and we compare the FADF statistics with the ones related to single equation approaches. This test is applied to public debt normalized by GDP, rather than by a discount factor, consistently with a definition of effective sustainability, which focusses on policy implications. We are still unable to reject the null hypothesis of non-sustainability for four countries. Nevertheless, our results confirm the potential of our approach in terms of power gains aind show that standard unit root tests lead to accept too often the null hypothesis of non-stationnarity.

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Paper provided by CEPREMAP in its series CEPREMAP Working Papers (Couverture Orange) with number 9815.

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Length: 128 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:cpm:cepmap:9815
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  1. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-19, September.
  2. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
  3. David W. Wilcox, 1987. "The substainability of government deficits: implications of the present- value borrowing constraint," Working Paper Series / Economic Activity Section 77, Board of Governors of the Federal Reserve System (U.S.).
  4. Wickens, M. R. & Uctum, Merih, 1993. "The sustainability of current account deficits : A test of the US intertemporal budget constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 423-441, May.
  5. Hamid Faruqee & Douglas Laxton & Steven Symansky, 1997. "Government Debt, Life-Cycle Income, and Liquidity Constraints: Beyond Approximate Ricardian Equivalence," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 374-382, September.
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  7. Willem H. Buiter & Urjit R. Patel, 1990. "Debt, Deficits and Inflation: An Application to the Public Finances of India," NBER Working Papers 3287, National Bureau of Economic Research, Inc.
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  9. Peter C.B. Phillips, 1986. "Towards a Unified Asymptotic Theory for Autoregression," Cowles Foundation Discussion Papers 782R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1986.
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  11. Trehan, Bharat & Walsh, Carl E., 1988. "Common trends, the government's budget constraint, and revenue smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 425-444.
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  13. Bohn, H., 1990. "The Sutainability Of Budget Deficits In A Stochastic Economy," Weiss Center Working Papers 6-90, Wharton School - Weiss Center for International Financial Research.
  14. Robert Holzmann & Yves Hervé & Roland Demmel, 1996. "The maastricht fiscal criteria: Required but ineffective?," Empirica, Springer, vol. 23(1), pages 25-58, February.
  15. Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics 300., Boston College Department of Economics.
  16. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
  17. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-45, July.
  18. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  19. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
  20. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
  21. repec:cup:etheor:v:10:y:1994:i:3-4:p:672-700 is not listed on IDEAS
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