Fiscal policy asymmetries and the sustainability of US government debt revisited

Steven Cassou (), Hedieh Shadmani () and Jesús Vázquez
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Hedieh Shadmani: Fairfield University

Empirical Economics, 2017, vol. 53, issue 3, No 13, 1193-1215

Abstract: Abstract This paper empirically investigates US fiscal policy sustainability and cyclicality in an empirical structure that allows fiscal policy responses to exhibit asymmetric behavior. We investigate this over two quarterly intervals, both of which begin in 1955:1. The short sample ends in 1995:2 and is most similar to the one used by Bohn (Q J Econ 113:949–963, 1998), whereas the full sample ends in 2013:3. Our estimation results show that the full sample period is sufficiently different from the short sample period, that the asymmetric (nonlinear) empirical models used in this paper are important and that the sustainability of US government debt topic needed to be revisited. Indeed, the short sample provides evidence of fiscal policy sustainability in line with Bohn’s (1998) findings. However, when considering the full sample, US fiscal policy is found sustainable during good economic times only according to the best fitting nonlinear model, but unsustainable for all specifications studied during times of distress. With regard to cyclicality, both samples show policy is asymmetric. Moreover, both samples show countercyclical policy during times of distress and the full sample results show some evidence that policy may be procyclical during good economic times.

Keywords: Asymmetric fiscal policy; Fiscal policy sustainability; Cyclicality; Threshold model (search for similar items in EconPapers)
JEL-codes: C52 E32 E62 H63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (14)

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DOI: 10.1007/s00181-016-1159-4

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