THE BEHAVIOR OF U.S. PUBLIC DEBT AND DEFICITS DURING THE GLOBAL FINANCIAL CRISIS

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  • Thanh Dat Nguyen
    Department of Economics and Finance La Trobe University Bundoora Victoria 3086 Australia
  • Sandy Suardi
    School of Accounting, Economics and Finance University of Wollongong Wollongong New South Wales 2522 Australia
  • Chew Lian Chua
    Melbourne Institute of Applied Economics and Social Research University of Melbourne Parkville Victoria 3010 Australia

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<jats:p>In this paper we test the sustainability of U.S. public debt for the period 1916–2012 by analyzing how the primary surplus to gross domestic product (<jats:styled-content style="fixed-case">GDP)</jats:styled-content> responds to changes in the debt to <jats:styled-content style="fixed-case">GDP</jats:styled-content> ratio in a time‐varying parameter model. Further, we determine the stationarity property of the debt/<jats:styled-content style="fixed-case">GDP</jats:styled-content> ratio while accommodating possible breaks in the data caused by wars and economic crisis under both the null and alternative hypotheses of an endogenous unit root test. The results show that the U.S. public debt was sustainable until 2005 when the primary surplus to <jats:styled-content style="fixed-case">GDP</jats:styled-content> reacted negatively to the debt/income ratio. This is further exacerbated during the global financial crisis when primary surpluses continued to fall with increased debt, thus jeopardizing the sustainability of fiscal policy. While the stationarity test shows that the U.S. fiscal debt/<jats:styled-content style="fixed-case">GDP</jats:styled-content> ratio is sustainable, it fails to highlight the risk that its debt policy has been becoming unsustainable in recent years. (<jats:italic>JEL</jats:italic> H62, E62, C2)</jats:p>

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