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Threshold Effects in the US Budget Deficit

  • Philip Arestis

    ()

    (University of Cambridge - Department of Land Economy)

  • Andrea Cipollini

    ()

    (Queen Mary, University of London - Department of Economics)

  • Bassam Fattouh

    ()

    (University of London - School of Oriental and African Studies (SOAS))

We contribute to the debate on whether the US large federal budget deficits are sustainable in the long run. We model the US government deficit per capita as a threshold autoregressive process. We find evidence that the US budget deficit is sustainable in the long run and that economic policymakers will only intervene to reduce per capita deficit when it reaches a certain threshold.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 18.

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Length: 22
Date of creation: 23 May 2003
Date of revision:
Handle: RePEc:rtv:ceisrp:18
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  1. Martin, G.M., 1998. "U.S. Deficit Sustainability: A New Approach Based on Multiple Endogenous Breaks," Monash Econometrics and Business Statistics Working Papers 1/98, Monash University, Department of Econometrics and Business Statistics.
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  3. 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.
  4. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  5. Alberto F. Alesina & Roberto Perotti, 1999. "Budget Deficits and Budget Institutions," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 13-36 National Bureau of Economic Research, Inc.
  6. 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.
  7. Bertola, G. & Drazen, A., 1991. "Trigger Pointsand Budget Cuts ; Explaining the Effects of Fiscal Austerity," Papers 26-91, Tel Aviv.
  8. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  9. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  10. 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.
  11. 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.).
  12. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  13. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  14. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  15. 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.
  16. Cipollini, Andrea, 2001. "Testing for Government Intertemporal Solvency: A Smooth Transition Error Correction Model Approach," Manchester School, University of Manchester, vol. 69(6), pages 643-55, December.
  17. Haug, A.A., 1993. "Has Federal Budget Deficit Policy Changed in Recent Years?," Papers 93-8, York (Canada) - Department of Economics.
  18. Bruce E. Hansen & Mehmet Caner, 1997. "Threshold Autoregressions with a Unit Root," Boston College Working Papers in Economics 381, Boston College Department of Economics.
  19. 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.
  20. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
  21. Uctum, Merih & Wickens, Michael, 2000. " Debt and Deficit Ceilings, and Sustainability of Fiscal Policies: An Intertemporal Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 197-222, May.
  22. Sarno, Lucio, 2001. "The behavior of US public debt: a nonlinear perspective," Economics Letters, Elsevier, vol. 74(1), pages 119-125, December.
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