Fiscal Re-Adjustments in the U.S.: A Non-Linear Time Series Analysis

23 Pages Posted: 26 Aug 2005

See all articles by Andrea Cipollini

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Bassam Fattouh

University of London - School of Oriental and African Studies (SOAS); University of London - Centre for Financial and Management Studies (CeFIMS)

Kostas Mouratidis

Swansea University

Date Written: August 2005

Abstract

We model the joint process for real per capita U.S. federal government spending and tax revenues as a Threshold Vector Error Correction. We find evidence that fiscal authorities will intervene to reduce real per capita deficit only when it reaches a certain threshold. We also find that fiscal re-adjustment takes place only through spending cuts. A further empirical support to the non-linear dynamics underlying the U.S. fiscal process is given by the superior performance of the non-linear model in terms of out-of-sample conditional forecasting of the government spending process.

Keywords: Deficit sustainability, threshold cointegration

JEL Classification: C32, E62

Suggested Citation

Cipollini, Andrea and Fattouh, Bassam and Mouratidis, Kostas, Fiscal Re-Adjustments in the U.S.: A Non-Linear Time Series Analysis (August 2005). Available at SSRN: https://ssrn.com/abstract=789264 or http://dx.doi.org/10.2139/ssrn.789264

Andrea Cipollini

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Bassam Fattouh (Contact Author)

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom
+020 7898 4053 (Phone)
+020 7898 4089 (Fax)

University of London - Centre for Financial and Management Studies (CeFIMS)

Exhibition Road
London, WC1E 7HU
United Kingdom

Kostas Mouratidis

Swansea University ( email )

Singleton Park
Swansea, SA2 8PP
United Kingdom

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