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Debt and Deficits: Fiscal Analysis with Stationary Ratios

Author

Listed:
  • John Y. Campbell
  • Can Gao
  • Ian W.R. Martin

Abstract

We introduce a new measure of a government's fiscal position that exploits cointegrating relationships among fiscal variables and output. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that—unlike the debt-GDP ratio—is stationary in the US and the UK since World War II. Fiscal deterioration forecasts a long-run decline in spending rather than increased tax revenue or low returns for bondholders. Fiscal adjustment to tax and spending shocks occurs through mean-reversion in tax and spending growth, with a negligible contribution from debt returns.

Suggested Citation

  • John Y. Campbell & Can Gao & Ian W.R. Martin, 2023. "Debt and Deficits: Fiscal Analysis with Stationary Ratios," NBER Working Papers 31224, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31224
    Note: AP EFG ME
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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