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Fiscal Readjustments in the US: A Non-linear Time Series Analysis

Cipollini, Andrea and Fattouh, Bassam and Mouratidis, Kostas (2007) Fiscal Readjustments in the US: A Non-linear Time Series Analysis. Working Paper. Finance Discussion Papers, Colchester.

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Abstract

We analyze the fiscal adjustment process in the US using a multivariate threshold Vector Error Regression Model (VECM). We find that the shift from a single equation to multivariate setting adds value both in terms of our economic understanding of the fiscal adjustment process in the US and the forecasting performance of non-linear models. First, we find evidence that fiscal authorities will intervene to reduce real per capita deficit only when it reaches a certain threshold and that the fiscal adjustment process takes place primarily by cutting government expenditure rather than increasing tax revenues. Second, the out-of-sample density forecast and probability forecasts results suggest that a shift from a univariate AR model specification to a multivariate model improves forecast performance. We also find that the forecasting performance of both linear and non-linear VECM is similar for long horizons (e.g. two years ahead).

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Depositing User: Susan Hearsum
Date Deposited: 24 Oct 2014 10:49
Last Modified: 24 Oct 2014 10:49
URI: http://repository.essex.ac.uk/id/eprint/10044

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