The Behavior of U.S. Public Debt and Deficits During the Global Financial Crisis

Abstract

In this paper we test the sustainability of U.S. public debt for the period 1916–2012 by analyzing how the primary surplus to gross domestic product (GDP) responds to changes in the debt to GDP ratio in a time‐varying parameter model. Further, we determine the stationarity property of the debt/GDP ratio while accommodating possible breaks in the data caused by wars and economic crisis under both the null and alternative hypotheses of an endogenous unit root test. The results show that the U.S. public debt was sustainable until 2005 when the primary surplus to GDP reacted negatively to the debt/income ratio. This is further exacerbated during the global financial crisis when primary surpluses continued to fall with increased debt, thus jeopardizing the sustainability of fiscal policy. While the stationarity test shows that the U.S. fiscal debt/GDP ratio is sustainable, it fails to highlight the risk that its debt policy has been becoming unsustainable in recent years. (JEL H62, E62, C2)

Tests for segmented cointegration: an application to US governments budgets

“…The consistency of fiscal policy, the sustainability of the government deficit and how it relates to discounted or undiscounted debt has long been subject to intense scrutiny. Empirical applications using models with coefficients that are subject to structural breaks and variables such as the primary surplus to GDP and debt to income ratio include among others, Martin (2000), Camarero et al (2015) and Nguyen et al (2017). For example, Camarero et al (2015) build upon the concept of multicointegration to show the existence of weak fiscal sustainability, and cointegration between deficit and debt for several OECD countries.…”

Estimating Bohn's Fiscal Sustainability Model with Temporal Variation: Evidence from Turkey

“…Bearing this point in mind, we estimate a time-varying fiscal reaction function for Turkey, which is classified as a developing country whose recent economic history is characterized by financial crises and fluctuations. For this purpose, we prefer the model introduced in Nguyen et al (2016).…”

“…1. Literature Review Nguyen et al (2016), on which our empirical analysis is based, is a seminal contribution to the fiscal sustainability literature. They build a state-space setting to integrate the time--varying properties to the model so as to analyse the US public debt sustainability from a dynamic perspective.…”

Esnek en Küçük Kareler Yöntemi̇ İle Türki̇ye’deki̇ Kamu Borcu Sürdürülebi̇li̇rli̇ği̇ni̇n Di̇nami̇k Anali̇zi̇

“…Their findings are also suggestive that, since 1946, the government has performed well in fiscal reaction generation to trim the unpleasant movements in public debt whenever needed. Nguyen et al (2016) estimated a time-varying fiscal reaction function in a state-space format using U.S. data. They test the sustainability of public debt in the U.S in an intertemporal setting by International Journal of Economic and Administrative Studies using the fiscal reaction function as a tool.…”