Journal
JOURNAL OF MONETARY ECONOMICS
Volume 54, Issue 7, Pages 1837-1847Publisher
ELSEVIER
DOI: 10.1016/j.jmoneco.2006.12.012
Keywords
intertemporal budget constraint; unit roots; cointegration; fiscal deficits; external deficits
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Time series related to fiscal and external deficits are commonly subjected to stationarity and cointegration tests to assess if the deficits are sustainable. Such tests are incapable of rejecting sustainability. The intertemporal budget constraint proves to be satisfied if either the debt series or the revenue and with-interest spending series are integrated of arbitrarily high order, i.e., stationary after differencing arbitrarily often. Revenues and spending do not have to be cointegrated. Rejections of low-order difference-stationarity and of cointegration are thus consistent with the intertemporal budget constraint. Error-correction-type policy reaction functions are suggested as more promising for understanding deficit problems. (c) 2007 Elsevier B.V. All rights reserved.
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