Working Paper: CEPR ID: DP18133
Authors: John Y. Campbell; Can Gao; Ian 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.
Keywords: public debt; fiscal deficits; fiscal policy; government spending
JEL Codes: E40; E60; E62; G12; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal deterioration (H69) | increased tax revenue (H29) |
| fiscal deterioration (H69) | low returns for bondholders (G12) |
| weak fiscal position (E62) | high expected tax growth (H29) |
| weak fiscal position (E62) | low expected spending growth (H69) |
| long-run adjustment (F32) | spending cuts (H56) |
| long-run adjustment (F32) | tax increases (H29) |
| fiscal deterioration (H69) | long-run decline in government spending (H56) |
| tax and spending shocks (H29) | mean-reversion in tax and spending growth (H29) |
| primary surplus-debt ratio (H62) | changes in tax revenue (H20) |
| primary surplus-debt ratio (H62) | changes in government expenditure (H50) |