US Fiscal Sustainability and the Causality Relationship between Government Expenditures and Revenues: A New Approach Based on Quantile Cointegration

Abstract

AbstractThis paper first aims to reinvestigate the issue of US fiscal sustainability by using the quantile cointegration approach proposed by Xiao (2009 and 2012). Our empirical evidence indicates a quantile‐dependent cointegrating relationship between government expenditures and revenues. In addition, this paper examines the long‐run causality relationship between expenditures and revenues by using the vector error‐correction (VEC) model with coefficients based on the different quantiles. Findings from the long‐run Granger‐causality analyses support the spend‐and‐tax hypothesis. Our investigation suggests that the government should show more discretion in increasing expenditures in the long run. Moreover, budget deficit reduction can only be achieved through reductions in government expenditures.