Testing a Government's Present-Value Borrowing Constraint
This paper studies whether fiscal policy satisfies a borrowing constraint. Direct tests of the present-value constraint are rare, despite widespread discussion of the feasibility of current policy. We examine monthly data on Canadian federal government finances using tests for cointegration. We also conduct variance bounds tests of the relationship between debt and surpluses. The results indicate that although real debt and real surpluses are nonstationary processes, their joint behaviour is consistent with a government borrowing constraint. Also the variability in current debt can be accounted for by the variability in anticipated future surpluses.
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