Explosive U.S. budget deficit

Gawon Yoon

Economic Modelling, 2012, vol. 29, issue 4, 1076-1080

Abstract: In this study, we present new evidence that the postwar U.S. federal budget deficit was explosive in nature. Because of the government's inevitable attempts to reduce high or rapidly growing budget deficits, the deficit may contain a substantial component that periodically collapses, which renders the standard unit root tests biased toward stationarity. We apply a newly proposed recursive unit root test for explosiveness, which is known to be powerful to the periodically collapsing component. Although the evidence for explosiveness we found herein is not overwhelming, this study should at the very least serve as a warning against a blind application of standard unit root tests to budget deficits, which may harbor components that periodically collapse.

Keywords: Budget deficit; Sustainability; Periodically collapsing; Recursive unit root test; Explosiveness (search for similar items in EconPapers)
JEL-codes: C22 H62 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1076-1080

DOI: 10.1016/j.econmod.2012.03.028

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