Fiscal policy asymmetries and the sustainability of US government debt revisited

Do US Government Tax Revenues and Expenditures Respond to Debt Levels and Economic Conditions Asymmetrically over the Business Cycle?

“…14 Moreover, the larger (in absolute value) coefficient during the below threshold case implies that policy makers are more focused on getting the economy back on track during economic downturns. This interpretation is consistent with the asymmetric fiscal policy results found in Balassone et al (2010) for a sample of fourteen European Union countries and found in Cassou et al (2017) for the U.S. economy. 15 Finally, the various fit parameters toward the bottom of the table do not provide strong evidence that the TR-0 model fits better than the simple LM model.…”

“…3 Another approach, advocated by Bohn (1998Bohn ( , 2007, uses a policy reaction methodology. His work, as well as related work by Collignon (2012) and Cassou et al (2017), have found that debt policy in the US is sustainable. 4 By estimating policy reaction equations for the two sides of the US government balance sheet, we also contribute to the sustainability debate.…”

“…The lagged debt coefficient is positive and insignificant. As emphasized by Cassou, Shadmani and Vá zquez (2017), Collignon (2012), and Bohn (1998), the positive sign on the lagged debt coefficient could be viewed as being consistent with a sustainable fiscal policy in the sense that tax revenue rises in reaction to debt accumulation. However, since it is not significant, there is not enough evidence in support of this interpretation.…”

“…Investigation of monetary policy has a bit of a head start in this regard, with the development of explicit optimization models by Ruge-Murcia (2003, 2004 and Surico (2007) along with empirical confirmation of these models by Ruge-Murcia (2003, 2004 as well as Cassou, Scott and Vá zquez (2012) and Cassou, Shadmani and Vá zquez (2013). So far, formal optimization models for fiscal policy are still elusive, but there is mounting empirical evidence that fiscal policy is asymmetric as results by Quintos (1995), Golinelli and Momigliano (2008), Balassone, Francese and Zotteri (2010), Sorensen and Yosha (2001), and Cassou et al (2017) have found. 1 This paper contributes to this literature by using Threshold Regression and Markov Switching models to investigate this issue.…”

“…This was noted by Kandil and Morsyb (2014) who argue that such countries have limited access to international funds, and concerns about policy credibility and unsustainability result in them not having sufficient resources to finance stimulus during recessions. 15 Balassone et al (2010) and Cassou et al (2017) show a strong countercyclical response when economic conditions arepoor. 16 A threshold of 0 implies that below threshold cases occur when the growth rate is below the average growth rate for the economy, while a threshold of -2.111 is more consistent with splitting the sample into recessionary and expansionary cases.…”