• John Y. Campbell


April 2023, Paper: "We study cointegrating relationships among fiscal variables and output and use them to introduce a new measure of the government’s fiscal position. In the US since World War II, we find that the primary surplus-GDP ratio and the government debt-GDP ratio are nonstationary, which invalidates standard analytical approaches that assume them to be stationary. The tax revenue-debt ratio and the government expenditure-debt ratio are also nonstationary but their difference, the primary surplus-debt ratio, is stationary, as is the tax revenue-GDP ratio. We develop a new framework for fiscal analysis that takes account of these facts. Empirically, we find that a deterioration in the fiscal position forecasts a decline in government spending over the long run. It does not forecast increases in tax revenue; nor does it forecast low returns for bondholders. Fiscal adjustment to tax and expenditure shocks occurs primarily through mean-reversion in tax and expenditure growth, with a negligible contribution from expected and unexpected debt returns. We find similar results for postwar UK data."