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Persistent deficits and the market value of government debt
Author(s) -
Smith Gregor W.,
Zin Stanley E.
Publication year - 1991
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950060104
Subject(s) - economics , constraint (computer aided design) , debt , budget constraint , government (linguistics) , cointegration , government debt , value (mathematics) , public finance , monetary economics , macroeconomics , econometrics , microeconomics , mechanical engineering , linguistics , philosophy , machine learning , computer science , engineering
This paper investigates whether postwar Canadian public financial policy satisfies a borrowing constraint. Direct tests of the present‐value relation suggested by this constraint shed light on the sustainability of current policy. We examine monthly data on Canadian federal government finances using tests for cointegration. The finding is that the joint behaviour of real debt and real surpluses is inconsistent with intertemporal budget balance for the government. One interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt. Alternatively, bondholders may expect the government to finance future interest payments from a source other than primary surpluses, e.g. the sale of physical assets.