SUSTAINABILITY OF FISCAL DEFICITS: THE U.S. EXPERIENCE 1929-2004

Ananda Jayawickrama and Tilak Abeysinghe ()

SCAPE Policy Research Working Paper Series from National University of Singapore, Department of Economics, SCAPE

Abstract: 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.

Keywords: Fiscal Policy Sustainability; Present-value Borrowing Constraint; Rational Expectations; Cointegration. (search for similar items in EconPapers)
JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-pbe and nep-sea
Date: 2006-11
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