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Sustainability Of Fiscal Deficits: The U.S. Experience 1929-2004

  • Ananda Jayawickrama

    ()

    (Department of Economics, National University of Singapore)

  • Tilak Abeysinghe

    ()

    (Department of Economics, National University of Singapore)

Recurrent large fiscal deficits and accumulating public debt frequently ring alarm bells around the world on the sustainability of U.S. federal fiscal policy. The present-value borrowing constraint, which states that, for the fiscal policy to be sustainable the current debt stock should match the discounted sum of expected future primary surpluses, provides a framework for analysing fiscal sustainability. Incorporating rational expectations we extend the methodology developed by Hamilton and Flavin (1986) to test the sustainability hypothesis in a cointegrating framework that can accommodate both stationary and non-stationary variables. Our model predicts dynamically diverse episodes of the debt series extremely well. Our results support the hypothesis that the U.S. government is solvent despite the large increase in the debt stock in recent years.

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File URL: http://www.fas.nus.edu.sg/ecs/pub/wp-scape/0701.pdf
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Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 05xx.

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Length: 29 pages
Date of creation: Nov 2006
Handle: RePEc:sca:scaewp:05xx
Contact details of provider: Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html

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