The Sustainability of Fiscal Policy in the United States

Abstract

The paper examines the sustainability of U.S. fiscal policy, finding substantial evidence in favor. I summarize the U.S. fiscal record from 1792-2003, critically review sustainability conditions and their testable implications, and apply them to U.S. data. I particularly emphasize the ramifications of economic growth. A "growth dividend" has historically covered the entire interest bill on the U.S. debt. Unit root tests on real series, unscaled by GDP, are distorted by the series' severe heteroskedasticity. The most credible evidence in favor of sustainability is the robust positive response of primary surpluses to fluctuations in the debt-GDP ratio.

Sustainability and Determinants of Italian Public Deficits before and after Maastricht

“…In particular, show that if real revenues, real public expenditures and real debt have unit roots, a stationary with interest deficit is sufficient to satisfy the ad hoc sustainability condition. Equivalent statements (as demonstrated by Bohn, 2004), based on budget identifies with fixed interest rate r, are that the primary surplus and debt are cointegrated with a cointegrating vector (1, -r); or that revenues, non-interest outlays and debt are cointegrated with vector (1, -1, -r). We use the original methodology, as the examination of the stochastic properties of the series is also required by the cointegration-vector error correction analysis of the determinants of fiscal choices.…”

“…The evolution of the Italian public finances thus provides a quite interesting sample for sustainability analysis. General government (1951General government ( -2003 To this end, we follow the methodology developed by Walsh (1988, 1991) and described by Bohn (2004) based on the idea of "ad hoc sustainability". This approach assesses the sustainability of particular fiscal policies by verifying whether it is on a trajectory path such that the expected present value of future primary surpluses equals the initial debt.…”

“…the results are also logically consistent, since the with interest deficit, which is a linear function of the primary deficit and public debt, is non-stationary, just like its components. This is a further condition of the Trehan-Walsh test, which is often violated, as in the case of the U.S. sample (Bohn, 2004).…”

Debt Sustainability and Financial Crises in South Africa

“…The risk of a further downgrade by credit rating agencies could also lead to a lower debt ceiling due to possible debt refinancing constraints. To capture this phenomenon, the time-varying threshold of the following form is posited for Model 3: (6) where is a fixed threshold similar to that in Model 1. When , debt is allowed to bridge its threshold level before corrective action is taken while a allows for a lower debt ceiling before debt consolidation is implemented.…”

“…The essential ingredient of debt sustainability is solvency or the ability of a country to service its debt in the long run. Bohn (2007Bohn ( , 2008 argues that sustainability of the intertemporal government budget requires government policies to be consistent with the present value of the budget constraint such that the present value of government expenditures equals the present value of its revenues. Thus the intertemporal budget constraint of the government is forward looking such that in a sustainable equilibrium, debt equals the sum of the discounted value of all future primary surpluses as opposed to the backward-looking fiscal reaction functions in some empirical studies.…”