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The Intertemporal Government Budget Constraint and Tests for Bubbles

Author

Listed:
  • Graham Elliott

    (Reserve Bank of Australia)

  • Colm Kearney

    (University of New South Wales)

Abstract

The methodology for the testing of bubbles in asset prices has recently been applied to testing the sustainability of government debt accumulation. In particular, Hamilton and Flavin (1986) and MacDonald and Speight (1987) use the methodology developed by Flood and Garber (1980) in an attempt to identify a period of bubble financing of the budget deficit for the US and UK respectively. MacDonald and Speight and Trehan and Walsh (1988) also use recently developed cointegration methods in an alternative test of the hypothesis of unsustainable financing. This paper uses the above methods to test for bubble financing of the fiscal deficit for Australia. We develop the method to allow for the effects of income growth on the sustainability of deficits and critically appraise some of the methods used in previous studies and suggest improvements. Our finding is that over the period 1953/54 to 1986/87 there is no evidence of unsustainability of government debt. The analysis suggests that instead, seignorage was used to pay for sustained fiscal deficits, and that the overall level of debt as a ratio of GDP fell over the period as a result of strong GDP growth and inflation.

Suggested Citation

  • Graham Elliott & Colm Kearney, 1988. "The Intertemporal Government Budget Constraint and Tests for Bubbles," RBA Research Discussion Papers rdp8809, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp8809
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    File URL: http://www.rba.gov.au/publications/rdp/1988/8809.html
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    Cited by:

    1. Christophe Ehrhart & Matthieu Llorca, 2008. "The sustainability of fiscal policy: evidence from a panel of six South-Mediterranean countries," Applied Economics Letters, Taylor & Francis Journals, vol. 15(10), pages 797-803.
    2. Emilia Câmpeanu & Andreea Stoian, 2010. "Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 501-518, December.
    3. Stoian, Andreea, 2012. "Fiscal Sustainability of the European Welfare State: Evidence from Cumulative Excess of the Primary Balance," Working Papers 27/2012, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
    4. Burret Heiko T. & Köhler Ekkehard A. & Feld Lars P., 2013. "Sustainability of Public Debt in Germany – Historical Considerations and Time Series Evidence," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(3), pages 291-335, June.
    5. Bogdan Dima & Oana Lobont & Cristina Nicolescu, 2009. "The Fiscal Revenues And Public Expenditures: Is Their Evolution Sustenable? The Romanian Case," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 1-42.
    6. António Afonso, 2005. "Fiscal Sustainability: The Unpleasant European Case," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 1-19, March.

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