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New Methods for Testing the Sustainability of Government Debt

Listed author(s):
  • Kazuki Hiraga

    (Faculty of Economics, Keio University)

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    Recently, several countries, which include not only developing, but also developed ones, face the severe sovereign crisis. In this circumstance, we introduce the new method for testing the sustainability of government debt. Previous studies which investigate the sustainability of government debt satisfies or not to test the Transversality condition of government debt. But, these studies are criticized by Bohn (1998, 2008) as "ad-hoc" sustainability, because the situation which satisfies transversality condition (in other words, the intertemporal government budget constraint is bind) is merely chance. Bohn (1998, 2008) suggest the sufficiency condition which satisfies the sustainability of government debt if the debt stabilization rule of government debt and primary surplus is satisfied. But, we do not know whether the government debt is really sustainable, at least in view of "Locally Ricardian" which Woodford suggests. Therefore we connect these discussions to apply the covariate augmented Dickey-Fuller (CADF) test to the government debt, and check whether the government debt is unit root or not using U.S data. Moreover, we apply the estimation method Hamilton and Flavin (1986) with covariates to check whether "Globally Ricardian" is really satisfied. In our results, U.S cannot obtain the sustainability at all time, even if the policy stabilization rule a la Bohn (1998, 2008) is satisfied. We show the sustainability rule is not sufficient condition empirically. On the other hand, "Globally Ricardian" is satisfied, and then the result is consistent with Woodford (1995, 1998).

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    Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2011-020.

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    Length: 14 pages
    Date of creation: Nov 2011
    Handle: RePEc:kei:dpaper:2011-020
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    1. Fossati, Sebastian, 2012. "Covariate unit root tests with good size and power," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3070-3079.
    2. Elliott, Graham & Jansson, Michael, 2003. "Testing for unit roots with stationary covariates," Journal of Econometrics, Elsevier, vol. 115(1), pages 75-89, July.
    3. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October.
    4. Jomana Amara & David Papell, 2006. "Testing for Purchasing Power Parity using stationary covariates," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 29-39.
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