DEFICITS, GOVERNMENT EXPENDITURES, AND TAX SMOOTHING IN THE UNITED-STATES - 1929-1988

Barro's tax smoothing hypothesis (TSH) implies that the government run s a 'budget deficit' whenever it anticipates the growth rate of nation al income to increase or the growth rate of its expenditure to decline . We test this implication of the hypothesis by examining the implied cross-equation restrictions on a vector autoregression (VAR) model usi ng U.S. data for the period ranging from 1929 to 1988. Our formal test s reject the hypothesis for the full sample period, but cannot reject it for the post-1947 period. Further investigations show that the stat istical rejection should be attributed to sharp differences in the sta tistical properties of the pre-1947 and the post-1947 data rather than the failure of the hypothesis itself.