Fiscal policy in the US: Ricardian after all ?

Pierre Aldama and Jerome Creel

No 2017-23, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: Historical data on US debt and primary surplus suggest the existence of different fiscal regimes which imply that, from time to time, US fiscal policy may have violated the government’s intertemporal budget constraint. But does evidence of locally unsustainable regimes eventually jeopardize the global sustainability of US public debt? We apply a Regime-Switching Model-Based Sustainability test which derives sufficient conditions on a regime-switching fiscal policy feeback rule such that fiscal policy can globally be sustainable while allowing for persistent unsustainable regimes. We find significant evidence of a globally Ricardian US fiscal policy, despite periodic and persistent unsustainable fiscal regimes. This conclusion remains valid after controlling for the reverse causality between the primary balance and the output gap.

Keywords: Fiscal rules; Fiscal regimes; Public debt sustainability; Time-varying parameters; Markov-switching models; Model-based sustainability (search for similar items in EconPapers)
JEL-codes: E6 H6 (search for similar items in EconPapers)
Date: 2017-10-26
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Working Paper: Fiscal policy in the US: Ricardian after all ? (2017)
Working Paper: Fiscal policy in the US: Ricardian after all ? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1723

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