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. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that---unlike the debt-GDP ratio---appears stationary in the US and 15 other developed countries. A weak fiscal position must ultimately be resolved by low future returns on government debt or by fiscal adjustment, a combination of high tax growth and low spending growth. Empirically, we find that debt returns play a negligible role and fiscal adjustment predominantly consists of changes in spending growth.

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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