Working Paper: NBER ID: w31224
Authors: 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.
Keywords: Fiscal Position; Debt; Deficits; Cointegration; Government Spending
JEL Codes: G12; H60; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax revenue (H27) | primary surplus-debt ratio (H62) |
| government spending (H59) | primary surplus-debt ratio (H62) |
| government spending (H59) | fiscal health (H68) |
| tax revenue (H27) | fiscal adjustments (E62) |
| government expenditures (H59) | fiscal adjustments (E62) |
| mean-reversion in tax revenue growth (H20) | fiscal adjustments (E62) |
| mean-reversion in government expenditure growth (H50) | fiscal adjustments (E62) |