Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition

Yoichi Tsuchiya

International Review of Economics & Finance, 2016, vol. 41, issue C, 189-201

Abstract: This study evaluates directional accuracy of long-term interest rate and nominal GDP growth forecasts made by the U.S. Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and private forecasters by applying a recently developed market-timing test. This study also investigates whether these forecasts provide useful indicators of the well-known Domar's fiscal sustainability condition and whether directional accuracy differs between ruling parties and the state of the economy. This study finds that the CBO forecast for Domar's condition is useful with a two-year horizon, whereas OMB and private forecasts are only useful with a one-year horizon. The directional accuracy of the forecasts does not differ between expansion and recession.

Keywords: Government forecasts; Debt sustainability; Forecast evaluation; Market-timing test; Nonparametric methods (search for similar items in EconPapers)
JEL-codes: C53 E17 H68 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:41:y:2016:i:c:p:189-201

DOI: 10.1016/j.iref.2015.08.012

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