Debt and Deficits: Fiscal Analysis with Stationary Ratios

John Campbell, Can Gao and Ian Martin

No 18133, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We introduce a new measure of a government's fiscal position that exploits cointegrating relationships among fiscal variables and output. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that---unlike the debt-GDP ratio---is stationary in the US and the UK since World War II. Fiscal deterioration forecasts a long-run decline in spending rather than increased tax revenue or low returns for bondholders. Fiscal adjustment to tax and spending shocks occurs through mean-reversion in tax and spending growth, with a negligible contribution from debt returns.

Keywords: Public debt; Fiscal deficits; Fiscal policy; Government spending (search for similar items in EconPapers)
JEL-codes: E40 E60 E62 G12 H60 (search for similar items in EconPapers)
Date: 2023-05
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Working Paper: Debt and Deficits: Fiscal Analysis with Stationary Ratios (2023)
Working Paper: Debt and Deficits: Fiscal Analysis with Stationary Ratios (2023)
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