Working Paper

Government budget deficits and trade deficits: are present value constraints satisfied in long-term data?

Abstract: We undertake tests of whether long term data from the U.S. and U.K. are consistent with the intertemporal government budget constraint and the intertemporal external borrowing constraint being satisfied in expected value terms, both individually and simultaneously. An historical perspective is appropriate for focusing on whether the present value constraints (PVCs) continue to hold in the face of unusual events, such as the outbreak of wars, that cause a structural break in the short-run dynamic behavior of the variables. This provides a very strong test of whether intertemporal budget constraints are satisfied. Our main results are: (i) the PVCs hold over the whole sample period; and (ii) the data are also consistent with the hypothesis that the PVCs continue to hold following events which cause a structural break in the short-run dynamics.

Keywords: Budget deficits; International trade;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 1995

Number: 494