Econometric implications of the government budget constraint

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Abstract

Despite Christ's (1968) warnings, modern macroeconometric models for policy analysis still fail to treat the government budget constraint (GBC) adequately. I point out that the potential consequences of mistaken handling of the GBC become more severe as forward-looking behavior is incorporated in macroeconometric models. Furthermore, contrary to popular belief, careful treatment of the GBC is shown to be a matter of primary importance even in models of the short and medium term.

Original languageEnglish (US)
Pages (from-to)9-19
Number of pages11
JournalJournal of Econometrics
Volume83
Issue number1-2
DOIs
StatePublished - 1998

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Government budget constraint
  • Ricardian equivalence
  • Taxation

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