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SOVEREIGN DEBT IN THE UNITED STATES AND GROWTH EXPECTATIONS

Published online by Cambridge University Press:  13 July 2018

Juan Equiza-Goñi
Juan Equiza-Goñi*
Affiliation:
Universidad de Navarra
*
Address correspondence to: Juan Equiza-Goñi, Universidad de Navarra, Campus Universitario, 31009Pamplona, Spain; e-mail: jequizag@unav.es
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Abstract

This paper shows empirical evidence and theory consistent with the US government using debt optimally to adjust the federal budget to news about long-term growth. First, using historical forecasts from the Congressional Budget Office (CBO) since 1984, I find that government purchases and deficits are positively correlated with expectations about long-term productivity, real gross domestic product, and tax revenue growth, whereas tax receipts are negatively correlated. A structural vector autoregression estimated with US quarterly data in 1955–2015 identifies permanent and transitory productivity shocks and points to “trend” shocks as the source of these correlations. Second, I present an open economy real business-cycle model with stochastic productivity trend and optimal public purchases and taxes. Calibrating the model to the US economy, the Ramsey planners' allocation yields moments aligned with those observed in the data.

Keywords

E62H21H63H68
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 447 - 477
Copyright
© Cambridge University Press 2018

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Footnotes

I am grateful to my PhD adviser Robert Kollmann and to Université Libre de Bruxelles (ULB) for their mini-Arc funding. I am also grateful to Mirko Abbritti, Antonio Moreno-Ibáñez, Roberto Pancrazi, Ugo Panizza, Rigas Oikonomou, and Tommaso Trani for useful comments. I thank seminar attendants at ECARES-ULB, Universidad de Navarra, Universidad Pública de Navarra, and Universitat Autónoma de Barcelona (UAB), as well as participants and discussants of the 2014 T2M conference, University of Warwick, Economics, PhD Student workshop, News and Fiscal Policy workshop, and INFER 2017 annual conference.

References

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