Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-10T12:45:44.076Z Has data issue: false hasContentIssue false
  • English
  • Français

SOVEREIGN DEBT IN THE UNITED STATES AND GROWTH EXPECTATIONS

Published online by Cambridge University Press:  13 July 2018

Juan Equiza-Goñi
Juan Equiza-Goñi*
Affiliation:
Universidad de Navarra
*
Address correspondence to: Juan Equiza-Goñi, Universidad de Navarra, Campus Universitario, 31009Pamplona, Spain; e-mail: jequizag@unav.es
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper shows empirical evidence and theory consistent with the US government using debt optimally to adjust the federal budget to news about long-term growth. First, using historical forecasts from the Congressional Budget Office (CBO) since 1984, I find that government purchases and deficits are positively correlated with expectations about long-term productivity, real gross domestic product, and tax revenue growth, whereas tax receipts are negatively correlated. A structural vector autoregression estimated with US quarterly data in 1955–2015 identifies permanent and transitory productivity shocks and points to “trend” shocks as the source of these correlations. Second, I present an open economy real business-cycle model with stochastic productivity trend and optimal public purchases and taxes. Calibrating the model to the US economy, the Ramsey planners' allocation yields moments aligned with those observed in the data.

Keywords

E62H21H63H68
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 447 - 477
Copyright
© Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am grateful to my PhD adviser Robert Kollmann and to Université Libre de Bruxelles (ULB) for their mini-Arc funding. I am also grateful to Mirko Abbritti, Antonio Moreno-Ibáñez, Roberto Pancrazi, Ugo Panizza, Rigas Oikonomou, and Tommaso Trani for useful comments. I thank seminar attendants at ECARES-ULB, Universidad de Navarra, Universidad Pública de Navarra, and Universitat Autónoma de Barcelona (UAB), as well as participants and discussants of the 2014 T2M conference, University of Warwick, Economics, PhD Student workshop, News and Fiscal Policy workshop, and INFER 2017 annual conference.

References

REFERENCES

Aguiar, M. and Gopinath, G. (2007) Emerging market business cycles: The cycle is the trend. Journal of Political Economy 115 (1), 69–102.CrossRefGoogle Scholar
Ambler, S. and Cardia, E. (1997) Optimal public spending in a business cycle model. In Hairault, J.-o., Hénin, P.-Y., and Portier, F. (eds.), Business Cycles and Macroeconomic Stability: Should We Rebuild Built-In Stabilizers?, p. 31. New York, NY: Springer.CrossRefGoogle Scholar
Ambler, S. and Paquet, A. (1996) Fiscal spending shocks, endogenous government spending, and real business cycles. Journal of Economic Dynamics and Control 20 (1), 237–256.CrossRefGoogle Scholar
Amdur, D. and Ersal-Kiziler, E. (2014) Trend shocks and the countercyclical us current account. Canadian Journal of Economics/Revue Canadienne d'économique 47 (2), 494–516.CrossRefGoogle Scholar
Bachmann, R. and Bai, J. H. (2013) Politico-economic inequality and the comovement of government purchases. Review of Economic Dynamics 16 (4), 565–580.CrossRefGoogle Scholar
Baxter, M. and Crucini, G. (1995) Business cycles and the asset structure of foreign trade. International Economic Review 36 (4), 821–854.CrossRefGoogle Scholar
Boz, E., Daude, C., and Durdu, C. B. (2011) Emerging market business cycles: Learning about the trend. Journal of Monetary Economics 58 (6), 616–631.CrossRefGoogle Scholar
Chari, V., Christiano, L. J., and Kehoe, P. J. (1994) Optimal scal policy in a business cycle model. Journal of Political Economy 102 (4), 617–652.CrossRefGoogle Scholar
Corsetti, G. and Mü, G. (2007) Twin deficits: Squaring theory, evidence and common sense. Economic Policy 21 (48), 598–638.CrossRefGoogle Scholar
Craig, S. G., Hemissi, W., Mukherjee, S., and Sorensen, B. E. (2016) How do politicians save? Buffer-stock management of unemployment insurance finance. Journal of Urban Economics 93, 18–29.CrossRefGoogle Scholar
Engel, C. and Rogers, J. H. (2006) The US current account deficit and the expected share of world output. Journal of Monetary Economics 53 (5), 5–1063.CrossRefGoogle Scholar
Ersal-Kiziler, E. (2016) International portfolio flows with growth shocks. Economics Letters 141, 84–86.CrossRefGoogle Scholar
Fernald, J. (2014) A Quarterly, Utilization-Adjusted Series on Total Factor Productivity. FRBSF working paper no. 2012-19.Google Scholar
Gali, J. (1999) Technology, employment, and the business cycle: Do technology shocks explain aggregate fluctuations? American Economic Review 89 (1), 1–249.CrossRefGoogle Scholar
Gilchrist, S. and Leahy, J. V. (2002) Monetary policy and asset prices. Journal of Monetary Economics 49 (1), 1–75.CrossRefGoogle Scholar
Gilchrist, S. and Saito, M. (2008) Expectations, asset prices, and monetary policy: The role of learning. In Campbell, J. Y. (ed.), Asset Prices and Monetary Policy, pp. 45–102. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Grechyna, D. (2016) Debt and deficit fluctuations in a time-consistent setup. Macroeconomic Dynamics 20 (7), 7–1771.CrossRefGoogle Scholar
Hoffmann, M., Krause, M. U., and Laubach, T. (2012) Trend growth expectations and US house prices before and after the crisis. Journal of Economic Behavior and Organization 83 (3), 3–394.CrossRefGoogle Scholar
Hoffmann, M., Krause, M. U., and Laubach, T. (2017) The Expectations-Driven US Current Account. The Economic Journal.CrossRefGoogle Scholar
Jones, J. B. (2002) Has fiscal policy helped stabilize the postwar US economy?. Journal of Monetary Economics 49 (4), 4–709.CrossRefGoogle Scholar
Kollmann, R. (1998) US trade balance dynamics: The role of fiscal policy and productivity shocks and of financial market linkages. Journal of International Money and Finance 17 (4), 4–637.CrossRefGoogle Scholar
Kumhof, M. and Laxton, D. (2013) Fiscal deficits and current account deficits. Journal of Economic Dynamics and Control 37 (10), 10–2062.CrossRefGoogle Scholar
Lucas, R. E. Jr and Stokey, N. L. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12 (1), 1–55.CrossRefGoogle Scholar
Marcet, A. and Scott, A. (2009) Debt and deficit fluctuations and the structure of bond markets. Journal of Economic Theory 144 (2), 2–473.CrossRefGoogle Scholar
Obstfeld, M. and Rogoff, K. (1995) The intertemporal approach to the current account. Handbook of International Economics 3, 1731–1799.CrossRefGoogle Scholar
Pakko, M. R. (2002) What happens when the technology growth trend changes? Transition dynamics, capital growth, and the new economy. Review of Economic Dynamics 5 (2), 2–376.CrossRefGoogle Scholar
Ramey, V. A. (2011) Identifying government spending shocks: It's all in the timing. Quarterly Journal of Economics 126 (1), 1–50.CrossRefGoogle Scholar
Rebei, N. (2014) What (really) accounts for the fall in hours after a technology shock? Journal of Economic Dynamics and Control 45, 330–352.CrossRefGoogle Scholar
Roubini, N. (1988) Current Account and Budget Deficits in an Intertemporal Model of Consumption and Taxation Smoothing. A Solution to the “Feldstein–Horioka Puzzle''? NBER working paper no. 2773.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61 (1), 1–163.CrossRefGoogle Scholar
Sims, E. (2011) Permanent and Transitory Technology Shocks and the Behavior of Hours: A Challenge for DSGE Models [Unpublished manuscript]. University of Notre Dame and NBER.Google Scholar
Wada, T. (2014) The role of transitory and persistent shocks in the consumption correlation and international comovement puzzles. Macroeconomic Dynamics 18 (6), 6–1234.CrossRefGoogle Scholar
Supplementary material: PDF

Equiza-Goñi supplementary material

Online Appendix

Download Equiza-Goñi supplementary material(PDF)
PDF 268 KB