US deficit sustainability: A new approach based on multiple endogenous breaks

Recent empirical work has questioned the consistency of US fiscal policy wi th an intertemporal budget constraint. Empirical results have tended to ind icate that the deficit process has undergone at least one structural shift during recent decades, with the deficit becoming either unsustainable or su stainable in only a weak sense in the post-shift period. In this paper, we re-examine sustainability using a new approach, based on a cointegration mo del with multiple endogenous breaks. A Bayesian methodology is applied, inc orporating Markov chain Monte Carlo simulators. In contrast to previous ana lyses, we find evidence of a sustainable deficit process over the 1947-1992 period, despite the occurrence of breaks during the 1970s and 1980s. Copyr ight (C) 2000 John Wiley & Sons, Ltd.