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U.S. Deficit Sustainability: A New Approach Based on Multiple Endogenous Breaks

Recent empirical work has questioned the consistency of U.S. fiscal policy with an intertemporal budget constraint. Empirical results have tended to indicate that the deficit process has undergone at least one structural shift during recent decades, with the deficit becoming either unsustainable or sustainable in only a weak sense in the post-shift period. In this paper, we re-examine sustainability using a new approach, based on a cointegration model with multiple endogenous breaks.

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Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 1/98.

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Length: 28 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:msh:ebswps:1998-1
Contact details of provider: Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2489
Fax: +61-3-9905-5474
Web page: http://www.buseco.monash.edu.au/depts/ebs/
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  1. Phillips, P.C.B., 1989. "Partially Identified Econometric Models," Econometric Theory, Cambridge University Press, vol. 5(02), pages 181-240, August.
  2. Kleibergen, Frank & van Dijk, Herman K., 1998. "Bayesian Simultaneous Equations Analysis Using Reduced Rank Structures," Econometric Theory, Cambridge University Press, vol. 14(06), pages 701-743, December.
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  6. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  7. repec:cup:etheor:v:10:y:1994:i:3-4:p:774-808 is not listed on IDEAS
  8. 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.
  9. 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.
  10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  11. Chib, Siddhartha, 1993. "Bayes regression with autoregressive errors : A Gibbs sampling approach," Journal of Econometrics, Elsevier, vol. 58(3), pages 275-294, August.
  12. Chao, J. C. & Phillips, P. C. B., 1998. "Posterior distributions in limited information analysis of the simultaneous equations model using the Jeffreys prior," Journal of Econometrics, Elsevier, vol. 87(1), pages 49-86, August.
  13. Schotman, Peter & van Dijk, Herman K., 1991. "A Bayesian analysis of the unit root in real exchange rates," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 195-238.
  14. de la Croix, David & Lubrano, Michel, 1994. "Are Interest Rates Responsible for Unemployment in the Eighties ? A Bayesian Analysis of Cointegrated Relationship with a Regime Shift," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1994015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  15. Phillips, Peter C.B. & Ploberger, Werner, 1994. "Posterior Odds Testing for a Unit Root with Data-Based Model Selection," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 774-808, August.
  16. Kleibergen, Frank & van Dijk, Herman K., 1994. "On the Shape of the Likelihood/Posterior in Cointegration Models," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 514-551, August.
  17. Peter C.B. Phillips, 1990. "To Criticize the Critics: An Objective Bayesian Analysis of Stochastic Trends," Cowles Foundation Discussion Papers 950, Cowles Foundation for Research in Economics, Yale University.
  18. 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.
  19. 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.).
  20. Lawrence J. Christiano, 1988. "Searching For a Break in GNP," NBER Working Papers 2695, National Bureau of Economic Research, Inc.
  21. Peter C.B. Phillips, 1991. "The Long-Run Australian Consumption Function Reexamined: An Empirical Exercise in Bayesian Influence," Cowles Foundation Discussion Papers 1000, Cowles Foundation for Research in Economics, Yale University.
  22. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  23. Eric Zivot & Peter C.B. Phillips, 1991. "A Bayesian Analysis of Trend Determination in Economic Time Series," Cowles Foundation Discussion Papers 1002, Cowles Foundation for Research in Economics, Yale University.
  24. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
  25. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
  26. 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.
  27. Chib, Siddhartha & Greenberg, Edward, 1996. "Markov Chain Monte Carlo Simulation Methods in Econometrics," Econometric Theory, Cambridge University Press, vol. 12(03), pages 409-431, August.
  28. 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.
  29. Phillips, P C B, 1991. "Bayesian Routes and Unit Roots: De Rebus Prioribus Semper Est Disputandum," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(4), pages 435-73, Oct.-Dec..
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  32. repec:cup:etheor:v:12:y:1996:i:3:p:409-31 is not listed on IDEAS
  33. 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.
  34. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
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