The Fiscal Cliff: Is U.S. Fiscal Policy Sustainable?
8 Pages Posted: 2 Aug 2013
Date Written: August 1, 2013
Abstract
The U.S. fiscal cliff has sparked renewed interest on the issue of fiscal sustainability. Using a time-varying parameter model with a longer data set (1916-2011), there is evidence that the response of primary surplus-income ratio to debt-GDP ratio shows (1) substantial variation over time, (2) the fiscal debt has become unsustainable since 2005 when primary surpluses have responded negatively to debt-income ratio, and (3) the lack of sustainability in fiscal policy continues through the subprime and global financial crises when huge liabilities were passed to the government from the financial sector.
Keywords: public debt, sustainability, primary surplus, time-varying parameter model
JEL Classification: H6, E6
Suggested Citation: Suggested Citation