Working Paper: CEPR ID: DP607
Authors: Fernando C. Ballabriga; Juan J. Dolado; Jose Vinals
Abstract: This paper uses cointegration techniques to assess the extent to which the behaviour of private- and public-sector savings and investment and those of the nation as a whole have been consistent with long-term solvency over the last three decades. In addition, an attempt is made to analyse whether excessive budget deficits might have undermined the nation's long-run external solvency. We find evidence that a number of countries violate both domestic intertemporal budget constraints, but nevertheless satisfy the nation's budget constraint. In most cases this has occurred because changes in government deficits have been offset by changes in private savings and investment and by the use of capital controls.
Keywords: intertemporal budget constraint; solvency; cointegration
JEL Codes: E21; F36; H61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excessive budget deficits (H62) | violation of domestic intertemporal budget constraints (D10) |
| changes in government deficits (H69) | private sector savings and investment adjustments (F32) |
| government fiscal policy (E62) | private sector savings behavior (D14) |
| stationarity of deficits (H62) | solvency (G33) |