Assessing the Sustainability of Government Debt: On the Different States of the Debt/GDP Process
This paper discusses the type of trajectory a country's public debt path follows. In particular, a Markov switching ADF model is used to assess the sustainability of public debt by testing whether a government's present value borrowing constraint holds. Building on the work of Raybaudi et al. (2004) and Chen (2011), the model in this paper generalizes their methodology. The number of lags and states are in principle unrestricted and all of the parameters can be switching. Debt trajectories of 16 countries are investigated using long time series on debt/GDP obtained from Reinhart and Rogoff (2011). Two different criteria are used to test the null hypothesis of a unit root in each state. The countries with a sustainable debt path are found to be Finland, Norway, Sweden, Switzerland and the UK, while Greece and Japan are found to have unsustainable debt trajectories. The debt paths of the remaining countries are mainly characterized as being in a unit root state and are therefore labeled as uncertain. Robustness tests indicate that the model is robust to the sample size and the number of states used. Further, it is shown that the models used in this paper offer an improvement to existing models investigating this subject.
|Date of creation:||2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.diw.de/en
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- António Afonso, 2005.
"Fiscal Sustainability: The Unpleasant European Case,"
FinanzArchiv: Public Finance Analysis,
Mohr Siebeck, Tübingen, vol. 61(1), pages 19-, March.
- Antonio Afonso, 2004. "Fiscal Sustainability: the Unpleasant European Case," Money Macro and Finance (MMF) Research Group Conference 2004 57, Money Macro and Finance Research Group.
- 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.).
- Wilcox, David W, 1989. "The Sustainability of Government Deficits: Implications of the Present-Value Borrowing Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 291-306, August.
- 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.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2011.
"From Financial Crash to Debt Crisis,"
American Economic Review,
American Economic Association, vol. 101(5), pages 1676-1706, August.
- Trehan, Bharat & Walsh, Carl E, 1991.
"Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 23(2), pages 206-23, May.
- Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
- Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
- Vasco Gabriel & Pataaree Sangduan, 2009.
"Assessing Fiscal Sustainability Subject to Policy Changes: a Markov Switching Cointegration Approach,"
School of Economics Discussion Papers
0309, School of Economics, University of Surrey.
- Vasco Gabriel & Pataaree Sangduan, 2011. "Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach," Empirical Economics, Springer, vol. 41(2), pages 371-385, October.
- Gabriel, Vasco J. & Psaradakis, Zacharias & Sola, Martin, 2002. "A simple method of testing for cointegration subject to multiple regime changes," Economics Letters, Elsevier, vol. 76(2), pages 213-221, July.
- Tanner, Evan & Liu, Peter, 1994. "Is the Budget Deficit "Too Large"?: Some Further Evidence," Economic Inquiry, Western Economic Association International, vol. 32(3), pages 511-18, July.
- James D. Hamilton & Marjorie A. Flavin, 1985.
"On the Limitations of Government Borrowing: A Framework for Empirical Testing,"
NBER Working Papers
1632, National Bureau of Economic Research, Inc.
- 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.
- Zacharias Psaradakis, 1998. "Bootstrap-based evaluation of markov-switching time series models," Econometric Reviews, Taylor & Francis Journals, vol. 17(3), pages 275-288.
- Troy Davig, 2005. "Periodically expanding discounted debt: a threat to fiscal policy sustainability?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 829-840.
- 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.
- Zacharias Psaradakis & Nicola Spagnolo, 2006. "Joint Determination of the State Dimension and Autoregressive Order for Models with Markov Regime Switching," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 753-766, 09.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992.
"Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?,"
Journal of Econometrics,
Elsevier, vol. 54(1-3), pages 159-178.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Haug, Alfred A, 1991. "Cointegration and Government Borrowing Constraints: Evidence for the United States," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(1), pages 97-101, January.
- Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
- Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
- Raybaudi, Marzia & Sola, Martin & Spagnolo, Fabio, 2004. "Red signals: current account deficits and sustainability," Economics Letters, Elsevier, vol. 84(2), pages 217-223, August.
When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1359. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek)
If references are entirely missing, you can add them using this form.