A segmented trend model to assess fiscal sustainability: The US experience 1929-2009

The academic literature has focused largely on testing for long-run fiscal sustainability. In this exercise we formulate a flexible regression model that can be used to assess the sustainability of a more recent build-up of fiscal deficits and debt that would be of major concern to policy makers. The analysis of US data shows that, after adjusting for some fundamentals, the gross Federal debt-income ratio has been growing at an unsustainable rate of 4 % per year since 2007. The net debt-income ratio does not show such a significant trend. Since not all government assets are readily available to reduce debt, significant positive trends in the gross debt-income ratio calls for policy actions.