Fiscal policy in the US : Ricardian after all ?
Abstract
Historical data on US debt and primary surplus suggest the existence of different fiscal regimes which imply
that, from time to time, US fiscal policy may have violated the government’s intertemporal budget constraint.
But does evidence of locally unsustainable regimes eventually jeopardize the global sustainability of US public
debt? We apply a Regime-Switching Model-Based Sustainability test which derives sufficient conditions on a
regime-switching fiscal policy feeback rule such that fiscal policy can globally be sustainable while allowing for
persistent unsustainable regimes. We find significant evidence of a globally Ricardian US fiscal policy, despite
periodic and persistent unsustainable fiscal regimes. This conclusion remains valid after controlling for the
reverse causality between the primary balance and the output gap.
Origin : Files produced by the author(s)