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Indicators and Tests of Fiscal Sustainability: An Integrated Approach

This paper shows that indicators and tests of government solvency should not be used alternatively. We present a simple and intuitive procedure to integrate simultaneously the results from the two approaches to fiscal sustainability. An application to U.S. post-World War II data demonstrates the empirical relevance of the proposed strategy. Our results suggest that U.S. fiscal policy is on a sustainable path, since the warning predictions of tax gap indicators merely reflect cyclical factors.

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File URL: ftp://www.ceistorvergata.it/repec/rpaper/RP111.pdf
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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 111.

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Length: 38 pages
Date of creation: 11 Jul 2008
Date of revision: 11 Jul 2008
Handle: RePEc:rtv:ceisrp:111
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CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma

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Fax: +39062020687
Web page: http://www.ceistorvergata.it
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  11. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
  12. 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.
  13. Jean-Claude Chouraqui & Robert P. Hagemann & Nicola Sartor, 1990. "Indicators of Fiscal Policy: A Re-Examination," OECD Economics Department Working Papers 78, OECD Publishing.
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  18. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  19. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  20. Buiter, Willem H. & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
  21. 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.
  22. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
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  24. Andrea Cipollini & Bassam Fattouh & Kostas Mouratidis, 2009. "Fiscal Readjustments In The United States: A Nonlinear Time-Series Analysis," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 34-54, 01.
  25. Nigel A Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
  26. Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
  27. Tanner, Evan & Liu, Peter, 1994. "Is the Budget Deficit "Too Large"?: Some Further Evidence," Economic Inquiry, Western Economic Association International, vol. 32(3), pages 511-18, July.
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