On Testing Sustainability of Government Deficits in a Stochastic Environment

Henning Bohn

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: In recent years, a number of empirical studies have examined the long-run sustainability of U.S. debt policy. Some studies conclude that U.S. fiscal policy has been sustainable, others disagree. This paper argues that the issue should be reexamined, because the traditional sustainability test explicitly or implicitly assume that the rate of return on government debt is "on average" above the rate of economic growth, a condition that does not hold for historical U.S. data. The paper derives and implements a new test for sustainability hat does not rely on a particular relation between interest rates and growth rates. I conclude that U.S. fiscal policy has historically satisfied a sufficient condition for sustainability.

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Related works:
Working Paper: On Testing the Sustainability of Government Deficits in a Stochastic Environment (1991)
Working Paper: On Testing Sustainability of Government Deficits in a Stochastic Environment (1991)
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