Testing for fiscal sustainability: New evidence from the G-7 and some European countries

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt-GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt-GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt-GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration.