HAS FEDERAL BUDGET DEFICIT POLICY CHANGED IN RECENT YEARS?

Abstract

This paper applies new tests for parameter instability in cointegrated regression models to the U.S. Federal government's intertemporal budget constraint in order to detect whether there has been a regime change in spending and taxing policies. Some researchers have argued that fiscal policy under Presidents Reagan and Bush moved the U.S. deficit onto an unsustainable path. My results suggest that government deficit policy in the 1980s was not significantly different from policies during the three earlier decades. However, a diverging debt‐GNP ratio suggests that the government will run into problems marketing its debt if current policy continues.