A new test for deficit sustainability and its application to US data

Dimitris Hatzinikolaou and Theodore Simos ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we define deficit sustainability by requiring formally that both the discounted debt vanish asymptotically and the undiscounted debt be bounded. Thus, a new necessary condition and a new testing procedure emerge. We propose a new test statistic and prove that its limiting distribution is standard normal, N(0, 1). Its finite- sample distribution differs from N(0, 1), however, mainly because it has fat tails, so we derive empirical critical values using simulations. Using the new test and United States (US) quarterly data, the conclusions of three earlier papers that fail to reject the sustainability of the US budget or current-account deficit are reversed.

Keywords: Undiscounted debt; budget; current account; sustainable (search for similar items in EconPapers)
JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
Date: 2011-08-14, Revised 2012-01-17
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Journal Article: A new test for deficit sustainability and its application to US data (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:45393

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