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Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?

  • Ahmed, S.
  • Rogers, J.H.

We undertake tests of whether long term data from the U.S. and U.K. are consistent with the intertemporal government budget constraint and the intertemporal external borrowing constraint being satisfied in expected value terms, both individually and simultaneously. An historical perspective is appropriate for focusing on whether the present value constraints (PVCs) continue to hold in the face of unusual events, such as the outbreak of wars, that cause a structural break in the short-run dynamic behavior of the variables. This provides a very strong test of whether intertemporal budget constraints are satisfied. Our main results are: (i) the PVCs hold over the whole sample period; and (ii) the data are also consistent with the hypothesis that the PVCs continue to hold following events which cause a structural break in the short-run dynamics.

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Paper provided by Pennsylvania State - Department of Economics in its series Papers with number 5-93-6.

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Length: 28 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:pensta:5-93-6
Contact details of provider: Postal: PENNSYLVANIA STATE UNIVERSITY, DEPARTMENT OF ECONOMICS, UNIVERSITY PARK PENNSYLVANIA 16802 U.S.A.
Phone: (814)865-1456
Fax: (814)863-4775
Web page: http://econ.la.psu.edu/

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  1. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Rodney L. White Center for Financial Research Working Papers 28-89, Wharton School Rodney L. White Center for Financial Research.
  2. 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.
  3. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  4. Husted, Steven, 1992. "The Emerging U.S. Current Account Deficit in the 1980s: A Cointegration Analysis," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 159-66, February.
  5. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers 03-91, Wharton School Rodney L. White Center for Financial Research.
  6. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  7. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  8. 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.
  9. 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.
  10. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  11. 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.
  12. Kremers, Jeroen J. M., 1989. "U.S. Federal indebtedness and the conduct of fiscal policy," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 219-238, March.
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