Testing for fiscal sustainability: New evidence from the G-7 and some European countries

• Published in: Economic modelling 2014-02, Vol.37, p.1-15
• Main Author: Chen, Shyh-Wei
• Format: Article
• Language: English
• Subjects: Budget deficits; Canada; Debt; Deficit financing; Econometrics; Economic theory; Europe; Experimental methods; Fiscal policy; GDP; Gross Domestic Product; Italy; Manycountries; Methodology; Public debt; Ratios; Studies; Sustainability; Threshold; U.S.A; Unit root
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2013.10.024

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt–GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt–GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt–GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration. •We test for fiscal sustainability for the G-7 and some European countries.•We apply a unit root process with the non-linear trend and asymmetric adjustment.•We find that the government's IBC will hold after considering the non-linear trend.•It is model-dependent for the debt–GDP ratios to be asymmetrically adjusted.