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Is the US Fiscal Deficit Sustainable? A Fractionally Integrated and Cointegrated Approach

Author Info

  • Juncal Cunado

    ()

    (School of Economics and Business Administration, University of Navarra)

  • Luis A. Gil-Alana

    ()

    (School of Economics and Business Administration, University of Navarra)

  • Fernando Pérez de Gracia

    ()

    (School of Economics and Business Administration, University of Navarra)

Abstract

The sustainability of fiscal deficits has received in recent years increasing attention from economists. Empirical work has concentrated on both the univariate properties of debt and the cointegration properties of public revenues and expenditures. In this paper, we examine if sustainability of the US fiscal deficit holds by means of studying the univariate properties of the difference between public revenues and expenditures. However, instead of using classical approaches based on I(1) or I(0) integration techniques, we use a methodology based on fractional processes. The results show that the public deficit in the US is an I(d) process with d slightly smaller than 1, implying that fiscal deficit is mean reverting, and thus, sustainable, though the adjustment process towards equilibrium will take a very long time.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random434f952645304/1132240565_wp0302.pdf
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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 03/02.

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Length: 30 pages pages
Date of creation: May 2002
Date of revision:
Publication status: Published, Journal of Economics and Business, 2004, vol. 56(6): pp. 501-526
Handle: RePEc:una:unccee:wp0302
Contact details of provider: Web page: http://www.unav.es/facultad/econom

Keywords:

Find related papers by JEL classification:

  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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  11. 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.
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  16. William R. Parke, 1999. "What Is Fractional Integration?," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 632-638, November.
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  18. 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.).
  19. Gil-Alana, Luis A., 2000. "Mean reversion in the real exchange rates," Economics Letters, Elsevier, vol. 69(3), pages 285-288, December.
  20. 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.
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