Persistent deficits and the market value of government debt

Abstract

This paper investigates whether postwar Canadian public financial policy satisfies a borrowing constraint. Direct tests of the present‐value relation suggested by this constraint shed light on the sustainability of current policy. We examine monthly data on Canadian federal government finances using tests for cointegration. The finding is that the joint behaviour of real debt and real surpluses is inconsistent with intertemporal budget balance for the government. One interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt. Alternatively, bondholders may expect the government to finance future interest payments from a source other than primary surpluses, e.g. the sale of physical assets.

Budget Deficit Sustainability of Bangladesh

“…Several studies are available to check the sustainability of budget deficits; e.g., Hamilton and Flavin (1986); Trehan and Walsh (1988;1991); Smith and Zin (1991); Haug (1995); Quintos (1995); Martin (2000) or Bajo-Rubio et al (2009) and many others. The results, though, seem to be still rather inconclusive due to differences in the econometric methodology.…”

The revenues-spending nexus in Romania: a TAR and MTAR approach

“…The literature reveals two kinds of empirical approaches: the first one is built on the linear assumption of the relationship between tax revenues and spending (e.g., Trehan & Walsh, 1988, 1991Hakkio & Rush, 1991;Haug, 1991;Smith & Zin, 1991;Quintos, 1995), while the second is focused on the nonlinear tax revenues-spending nexus (Bertola & Drazen, 1993;Arestis, Cipollini, & Fattouh, 2004;Bajo-Rubio, Diaz-Roldan, & Esteve, 2004Ewing, Payne, Thompson, & Al-Zoubi, 2006;Arghyrou & Luintel, 2007;Cipollini, Fattouh, & Mouratidis, 2009;Apergis, Payne, & Saunoris, 2012;Paleologou, 2013).…”

“…In the first approach, Walsh (1988, 1991), Haug (1991), and Smith and Zin (1991) test the cointegration between public revenues and expenditures, and claim a linear long-run relationship. The targeted countries are the US and Canada.…”

Panel cointegration tests of the sustainability hypothesis in rich OECD countries

“…Most of the earlier work in this field focused on the stationarity of public deficit and debt as a way to empirically test the sustainability hypothesis. Prominent examples include, among others, Wilcox (1989), MacDonald (1992), Hakkio and Rush (1991) and Quintos (1995) for the United States, Smith and Zin (1991) for Canada, for Italy, Olekalns (2000) for Australia, and perhaps most recently Kirchgaessner and Prohl (2006) for Switzerland. The overall picture being that the sustainability hypothesis does not hold.…”