THE INTERTEMPORAL GOVERNMENT BUDGET CONSTRAINT - AN APPLICATION FOR THE NETHERLANDS

In this paper it is examined whether fiscal policy in the Netherlands is in accordance with the intertemporal budget constraint. After a car eful review of previous studies, it is decided to use the test as prop osed by Trehan and Walsh [1989, 1991], which consists of examining the stationarity of the deficit inclusive interest payments. The outcomes of the Phillips-Perron tests are in accordance with intertemporal bud get balance. So despite the occurrence of government deficits as conve ntionally measured, fiscal policy in the Netherlands is in accordance with intertemporal government budget balance. It is also shown that an increase in government spending is eventually followed by higher taxe s. A unit increase in taxes is followed by a reduction of about 75% of the impulse, and an increase of government spending.