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Periodically expanding discounted debt: a threat to fiscal policy sustainability?

Troy Davig

Journal of Applied Econometrics, 2005, vol. 20, issue 7, 829-840

Abstract: This paper models the behaviour of discounted US debt using a Markov-switching time series model. The significance of modelling fiscal policy within this framework derives from the implications it has for long-term sustainability. The two-regime framework used in this paper identifies periods where the present value of US Federal debt is expanding versus periods when it is collapsing. Using an updated data series from Hamilton and Flavin (1986), a test is conducted to establish if the expanding periods pose a threat to the long-run sustainability of fiscal policy. For the USA, it is found that they do not. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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DOI: 10.1002/jae.807

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