Econometric implications of the government budget constraint

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.