Dynamics between the budget deficit and the government debt in the United States: a nonlinear analysis

Abstract

<jats:title>Abstract</jats:title><jats:p>This paper empirically investigates the dynamics between budget deficit and government debt in the U.S. using two different measures of the budget deficit: the current budget deficit and cyclically-adjusted budget deficit. A threshold Vector autoregression (VAR) model is estimated to explore the dynamics in different regimes using quarterly data from 1947:Q1 to 2017:Q3. The specification test rejects a linear VAR model against the threshold VAR. When we use the current budget deficit, regime 1 resemble governments prioritize minimizing budget deficit and debt, whereas, regime 2 resemble otherwise. When we use the cyclically adjusted budget deficit, regime 1 resemble economic expansions, whereas, regime 2 resemble recessions. The impulse responses show evidence of asymmetry and counter-cyclicality. The impulse responses also indicate that an increase in the debt dictate the government’s response towards minimizing the budget deficit and tend to prioritize budget deficit less when the economy expands.</jats:p>

Debt sustainability and the fiscal reaction function: evidence from MIST countries

“…For an economy to satisfy its intertemporal budget constraint and the so-called no-Ponzi condition, the coefficient θ > 0 is sufficient provided the present value of GDP is finite and ξ t < ∞ as a fraction of GDP as well. 2 However, other studies 3 have shown that a positive coefficient θ cannot be viewed as a sufficient condition to achieve fiscal sustainability, especially if there is a limit for positive values of primary balance, for instance, at a very high debt level, or if the reaction of financial market is…”

“…The explanatory power as measured by the goodness of fit statistics is 0.525. In column [2], including the time fixed effect in the Base model improves the explanatory power. The FRF coefficient is slightly lower and remains statistically significant.…”

“…See Tanner and Samake[43], Islam and Biswas[26], Makin[35], Ahmed[2], Mahmood and Rauf[34], Kaur et al[31], Agnello and Sousa[1], and Renjith and Shanmugam[40].…”