Assessing effective sustainability of fiscal policy within the G-7

This paper introduces a new unit root test, using 'Feedback Covariates', in order to test for sustainability of fiscal policy within the G-7. Non-sust ainability is considered as the null response to inherited debt. We charact erize the distribution of the FADF (Feedback Augmented Dickey-Fuller) stati stics under both the null and the near unit root alternative and we compare the FADF statistics with the ones related to single equation approaches. T his test is applied to public debt normalized by GDP, rather than by a disc ount factor, consistently with a definition of effective sustainability, wh ich focusses on policy implications. We are still unable to reject the null hypothesis of non-sustainability for four countries. Nevertheless, our res ults confirms the potential of our approach in terms of power gains and sho ws that standard unit root tests leads to accept too often the null hypothe sis of non-stationarity.