U.S. Budget Deficit Sustainability Revisited: Long Run, Persistence, and Common Trend

The U.S. budget deficit is examined on the basis of the intertemporal budget constraint (IBC) by applying a fractional cointegration approach. Thus, the main contribution of this paper is the elaboration of new conditions, depending on the persistence of the error term, for the degree of fiscal sustainability, which allow the investigation of different sizes of the budget deficit; this is a new empirical approach in the literature. Furthermore, although a unitary long-run relationship between income and expenses is interpreted under the IBC as strong sustainability, the fractional cointegration prism checks the duration of shocks that might affect in different ways the controllability of the fiscal policy. Additionally, we have found that expenditures and revenues are permanent components in the common trend, i.e., both variables are basic in the design of the U.S. budget.