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There are good reasons to expect that attributes of local public finance may impact urban land use and, specifically, sprawl. A detailed and novel investigation of U.S. metropolitan areas published in 20061 provides substantial insights into the causes of sprawl, but it overlooks the main characteristics of local public finance (taxes and user charges). Using a subset of the data matched to city public finance data, a parallel analysis gives insight into the impacts of local public finance on sprawl. There is evidence that greater reliance on local property taxes reduces sprawl. The evidence that user charges (primarily for water, sewerage and solid waste services) could have a similar effect is weak but suggestive. The combined effects of a high reliance on property taxes and user charges (compared to typical levels) might reduce sprawl by as much as one-third. For Calgary and Edmonton, this means that the current heavy reliance on property taxes in both cities reduces sprawl and that the adoption of alternative local taxes--that reduce reliance on property taxes--is expected to increase sprawl. Further analysis of the impacts of local public finance on urban sprawl is warranted. [ABSTRACT FROM AUTHOR]

Local governments provide many crucial services from limited budgets, yet often subsidize the profitable, private businesses in professional sports leagues in the United States. Policing represents one important public service. Policing typically constitutes large portions of government budgets and also generates revenue through fines and forfeitures. Existing evidence suggests that large municipal expenditures in other areas can have an ambiguous effect on policing outcomes. This paper addresses the question of whether large public expenditures on sports facilities affect drug asset forfeiture using two-way fixed effects (TWFE) and generalized dynamic model specifications (GDMS). The results are similar across estimation methods, with static TWFE results suggesting a treatment effect of $1,274–5,589 in additional forfeiture per million in subsidies and results from the newer GDMS estimators suggesting $7,703 per million in subsidies. The results imply that, beyond generating no tangible local economic benefits, public subsidization of sports facilities also leads police to make up budget shortfalls by more aggressive policing, which has important implications for racial equity. [ABSTRACT FROM AUTHOR]

Explores how the banks chartered by states in the United States (U.S.) provide a source of flexibility in state public finance following the decision of the U.S. Constitution to remove the states' power to issue paper money. Role of investment earnings and tax revenues derived from banks in state public finance; Importance of state-bank relationships to public finance.

This article presents summaries of various papers published in the March 1996 issue of "The Journal of the American Taxation Association." One of the papers examines the impact of three personal tax credits on the progressivity of the individual federal income tax during 1979-1988, using two progressivity indices and one income redistribution index. The objective of another paper is to identify and study the nature of horizontal inequities in the U.S. federal tax system that arise from the differential tax treatment of different types of income. In this paper, a taxpayer's ability to pay taxes is measured by expanded total income, an extension of Adjusted Gross Income that attempts to measure economic income. The Tax Reform Act of 1986 is the focus of another paper. The act increased the tax burden on the property and casualty insurance industry. This paper explores the extent to which that increase was borne by owners, consumers, and labor. The paper shows that single industry approach would be the most promising direction for future research into tax shifting.

The increasing trend of special districts deserves more attention as it raises concerns on the efficiency and accountability of the fragmented local governance system in America. This paper examines whether the rapid growth of special districts can be partially explained by the expansion of state-imposed tax and expenditure limitations (TELs) during the last several decades. Using panel data from 1972 to 2007, this paper finds that TELs produce unintended circumvention effects among local governments. Specifically, the results reveal TELs motivate local general-purpose governments to create new special districts as an institutional strategy to evade the fiscal constraints imposed by the state. [ABSTRACT FROM AUTHOR]

Purpose – The aim of this paper is to focus on the transition from slavery to wage workers in the American South and British West Indies, and the corresponding nature of the reporting and control procedures that were established in both venues, in order to create a disciplined workforce, and establish regular relations between employees and employers. It seeks to explain the differences in labour control practices between the two regions and to discuss the impact on these practices of accounting and other quantitative techniques c.1760-1870. In particular, it aims to consider the central role played by government in the process. Design/methodology/approach – The study forms part of an archival research project, in which the authors have consulted archives in four Southern States (Alabama, Louisiana, Mississippi, and North Carolina), three Caribbean island nations, formerly British colonies (Antigua, Barbados, and Jamaica), and record repositories the length and breadth of Great Britain. The records of the Freedmen's Bureau (FB), located in the National Archives, Washington, DC, have been likewise visited. These primary sources have been supported by the extensive secondary literature on slavery and its aftermath. Findings – In the USA, accounting for labour in the transition from slavery was typically ad hoc and inconsistent, whereas in the BWI it was more organised, detailed, and displayed greater uniformity – both within and across colonies. The role of the British Colonial Office (BCO) was crucial here. A range of economic and political factors are advanced to explain the differences between the two locations. The paper highlights the limitations of accounting controls and economic incentives in disciplining labour without the presence of physical coercion in situations where there is a refusal on the part of the workers to cooperate. Originality/value – There is a relatively small volume of secondary literature comparing US and BWI slavery and its legacy. Likewise, the accounting implications of labour-control practices, during the transition from slavery to freedom, are largely understudied. The research also points to a need to assess the decision-influencing capabilities of management accounting systems in other transitional labour settings. [ABSTRACT FROM AUTHOR]

Lifestyle can often affect the likelihood an individual will have a future illness. Subsidies often mitigate the consequences of poor lifestyle choices. In this paper we explore tax-subsidy policies that lower the consequences of incurring ill health. We find that a funding mechanism consistent with current US policy lowers the investment in healthy lifestyles by both the wealthy, who pay taxes, and the poor, who receive subsidies. We also explore alternative policy interventions such as investing in research to lessen the impact or probability of the disease. [ABSTRACT FROM AUTHOR]

Though forgotten by history, the 1935 Gold Clause cases concerning abrogation of gold-indexed bonds were instantly dubbed historical landmarks. Perry v. U.S., the case addressing federal bond contracts, should be remembered as an important instance of strategic judicial retreat. Expecting that the wrong outcome would provoke an attack and harm its legitimacy, the Supreme Court granted the administration an important technical victory. This paper elucidates three conditions necessary for retreat: (1) very strong government outcome preferences, (2) signals of a direct attack, and (3) an environment which makes these threats credible. It compares the Gold Clause cases with a control case, U.S. v. Butler. It shows that the former strongly met the conditions while the latter, in which the Court made a sincere decision, did not. Finally, it refutes legal and attitudinal explanations and argues that the Perry opinion was written to grudgingly reach the strategically necessary result by granting a technical victory in the remedy. [ABSTRACT FROM AUTHOR]

Several recent papers agree on the existence of significant regime shifts in the U.S. real interest rate, but disagree on the proximate causes of the shifts. Caporale and Grier (2000) point to large political changes as correlates, while Rapach and Wohar (2004) show that real rate breaks are correlated with inflation regime shifts and argue that the inflation regime changes cause the real rate shifts. In this paper we show that, controlling for the timing of changes in the inflation regime, dummy variables representing either party change in the Presidency or change in the identity of the Fed Chair are still strongly significant for explaining real interest rate fluctuations. When we control for a fixed coefficient linear relationship between inflation and the real rate, we find two real rate regime shifts that line up almost exactly with the accessions of Paul Volcker and Alan Greenspan. Even if we first let inflation regime switches explain the real rate and then look for regime shifts in the residuals, we find almost exactly the same two breaks. These results imply that Fed Chairs sometimes differ with respect to their preferred equilibrium real interest rate. [ABSTRACT FROM AUTHOR]

The paper examines alternative options for managing public debt and public assets in a government balance sheet framework that includes the Treasury, the Federal Reserve, and Social Security. Even after September 11, U.S. fiscal policy is on a trajectory to accumulate substantial "uncommitted funds." The paper examines how such funds should be invested. I conclude that high-quality fixed-income securities are the best benchmark and that Social Security is the most appropriate government asset manager. The analysis of policy alternatives reveals a trilemma between maintaining a liquid Treasury market, minimizing rent seeking, and facilitating inter-generational risk sharing. [ABSTRACT FROM AUTHOR]

While considered uncommon in relation to U.S. corporate bankruptcies, an increasing number of Chapter 9 municipal defaults have occurred in the past twenty-five years. Bankruptcy has been voluntarily sought and, in most cases, successfully executed to overcome fiscal stress in U.S. cities of all sizes. This paper recounts the complex tale of the three largest U.S. public fiscal crises within the early 21st century: the City of San Diego, California, Jefferson County, Alabama, and the City of Detroit, Michigan. Fiscal stress in a local government threatens the quality of municipal services and diminishes citizen confidence in their local leadership. The cases illustrated in this paper highlight the continued importance of studying the reasons for and solutions deployed to overcome fiscal stress conditions in local government. The research findings are of particular relevance to fiscal officers hoping to avert similar emergencies today. [ABSTRACT FROM AUTHOR]

This paper addresses the question of whether it is fair to use US taxpayer dollars on prison education programs. Through a philosophical inquiry from a pragmatist lens and a feminie ethic of care, issues of fairness are clarified. Following the philosophical inquiry, a historical analysis provides some background on the issue of prison history and reform movements in America. Finally, I conclude by briefly highlighting the main arguments in favor of funding prison education programs with US tax payer dollars. [ABSTRACT FROM AUTHOR]

The article considers some aspects of the financial history of the United States. It focuses on some of the monetary operations of the Treasury during the years of depression that followed the crisis of 1893. The article highlights the salient events of the period, including the struggle with a declining revenue, the continued drain on the gold holdings, the repeated danger of the Treasury's collapse, and the successive loans needed to save it from virtual bankruptcy. The difficulties under which the Treasury inevitably labors under the present anomalous system or lack of system are examined.

Complexity has been linked to the quality of an income tax system (Dean, Keenan, and Kenney [1980]), including its possible influence on the system's ability to generate revenues (New York State Bar Association [1972]). Given the IRS' recent estimate that $81 billion in annual revenue is lost through noncompliance (IRS [1983, p. 21]), the question of whether tax complexity has a significant effect on taxpayers' reporting positions is a potentially important issue. Complexity represents but one strand in a web of interrelated factors and propositions influencing compliant tax reporting in a democratic society. Nevertheless, it has been singled out as a factor affecting compliance and a study of its effect thereon can be viewed as one step in an ongoing program of study of noncompliance. This study involved two distinct phases. The first phase was devoted to obtaining operational definitions of tax complexity, using multidimensional scaling. These definitions of tax complexity were then used in the second phase of the study to test for potential effects of complexity on reporting position selections in four different tax situations. While phase I is critical to phase 2 of my study, this paper highlights the results of the latter. Details of phase 1 can be obtained in Milliron [1984]. In section 2 I discuss previous literature involving tax complexity. Section 3 provides an overview of the methodology and the research issues studied. Sections 4 and 5 describe the data collection procedures and research findings of phases 1 and 2, respectively. The results indicate that taxpayers defined complexity in terms of four distinct dimensions, and that complexity did significantly influence tax-reporting positions. The conclusions, limitations, and potential extensions appear in section 6. [ABSTRACT FROM AUTHOR]

The weekly Treasury bill sale is conducted as a discriminatory auction because the Treasury maintains this maximizes its revenue. Opponents of this procedure, including Friedman and Smith, maintain a competitive auction would generate greater revenue because it would increase the number of participants, increasing demand and encouraging higher bids. Brimmer, Goldstein, and Rieber maintain that revenues under the present auction procedure are greater because any increased revenue from an enlarged participation would be offset by the loss of the revenue gained from the discrimination. To date this issue is unresolved. This paper attempts to determine empirically if the discriminatory auction or the competitive auction is the more compatible with the Treasury's revenue raising objectives. [ABSTRACT FROM AUTHOR]

The article presents commentary and criticism regarding the reports "Metropolitan Fiscal Disparities: Their Nature and Determinants," by Seymour Sacks and "Revenue Sharing: Priorities and Policy Instruments," by George F. Break, both included within the issue. The author challenges the papers' methodology in "deterministically" studying the problems of lower-level government. It is suggested that the scope of such studies is often misleading due to the inability to represent citizen heterogeneity in fiscal opinion and decision making.

This paper studies how fiscal policy affects loan market conditions in the United States. First, it conducts a structural vector-autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a dynamic stochastic general equilibrium model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock. (JEL E44, E62 ) [ABSTRACT FROM AUTHOR]

Drawing on recent contributions inferring financial interconnectedness from market data, our paper provides new insights on the evolution of the US financial industry over a long period of time by using several tools coming from network science. Relying on a Time-Varying Parameter Vector AutoRegressive (TVP-VAR) approach on stock market returns to retrieve unobserved directed links among financial institutions, we reconstruct a fully dynamic network in the sense that connections are let to evolve through time. The financial system analysed consists of a large set of 155 financial institutions that are all the banks, broker-dealers, insurance and real estate companies listed in the Standard & Poors’ 500 index over the 1993–2014 period. Looking alternatively at the individual, then sector-, community- and system-wide levels, we show that network sciences’ tools are able to support well-known features of the financial markets such as the dramatic fall of connectivity following Lehman Brothers’ collapse. More importantly, by means of less traditional metrics, such as sectoral interface or measurements based on contagion processes, our results document the co-existence of both fragmentation and integration phases between firms independently from the sectors they belong to, and doing so, question the relevance of existing macroprudential surveillance frameworks which have been mostly developed on a sectoral basis. Overall, our results improve our understanding of the US financial landscape and may have important implications for risk monitoring as well as macroprudential policy design. [ABSTRACT FROM AUTHOR]

This paper provides a theory of earmarking based on the relative power of a legislature and executive. The politically powerful use earmarking as a means of resolving uncertainty and insulating preferred policy from the reach of future government. Tax revenue will be earmarked more often when political power is unified under one party or when a party has the legislative majority needed to overturn a gubernatorial veto. An empirical test of the theoretical predictions are conducted using a panel of data for US states. A state with a legislature controlled by a single party with a large enough majority to overturn a gubernatorial veto will earmark 5% more of its tax revenue than other states and a state with a unified government will earmark 6.5% more. Together these explain 18.5% of the observed decrease in the percentage of state tax revenues earmarked from 1954 to 1997. [ABSTRACT FROM AUTHOR]

Areas differ in their propensity to experience natural disasters. Exposure to disaster risks can be reduced either through migration (i.e., self-protection) or through public infrastructure investment (e.g., building seawalls). Using migration data from the 1920s and 1930s, this paper studies how the population responded to disaster shocks in an era of minimal public investment. We find that, on net, young men move away from areas hit by tornados but are attracted to areas experiencing floods. Early efforts to protect against future flooding, especially during the New Deal era of the late 1930s, may have counteracted an individual migration response. [ABSTRACT FROM AUTHOR]

Debt limits, interest coverage ratios, one-off balanced budget requirements, pay-as-you-go rules, and tax and expenditure limits are among the most important fiscal rules for constraining intertemporal transfers. There is considerable evidence that the least costly and most effective of such rules are those that focus directly on the rate of spending growth, even with their seemingly ad hoc nature and possibilities for circumvention. In this paper, we use optimal control theory and martingale methods to justify a transparent, nonarbitrary rule governing maximum sustainable rate of spending growth, treating the revenue structure of a jurisdiction as a given continuous-time stochastic process. Our results can be used to determine whether a proposed rate of spending growth is sustainable or not. © 2009 by the Association for Public Policy Analysis and Management [ABSTRACT FROM AUTHOR]

The article presents an exploration into the development of the concept of public opinion within U.S. political discourse during the Federalist era. Details are given noting the onset of the term and its impact in public discourse in the late 18th century, particularly as it related to economic political debate in connection to public finance issues of credit and debt. Discussion is offered mapping the correlations between the financial history of the U.S. in the aftermath of the Revolutionary War and the appropriation of "public opinion" into the political discourse of major figures such as James Madison and Alexander Hamilton.

Purpose - The purpose of this paper is to highlight the importance of property rights institutions to disaster relief efforts, with a focus on the US Federal Emergency Management Agency in the aftermath of Hurricane Katrina in New Orleans, Louisiana. Design/methodology/approach - The paper utilizes public choice, Austrian, and new institutional analyses of bureaucracy. It discusses private and public sector responses to the situation in New Orleans following Katrina and to disasters in general, and compares the institutional frameworks that develop over time in both sectors. Findings - The paper finds that a large and bureaucratized response to disasters hinders economic calculation, incentive structure, and property rights institutions, all of which are crucial for rapid disaster response, the relief of human suffering, the minimization of knowledge problems, and the promotion of an efficient allocation of resources. Practical implications - This research suggests that the role of the price system in allocating resources is especially important following disasters and that in order to ensure relief efforts are as efficient as possible, public, sector actors should do nothing to impede them. It also suggests that the incentives to prepare an efficient emergency preparedness program are greater when those most affected by potential disasters are held responsible for their implementation. Originality/value - The paper provides a critical evaluation of the role of highly centralized approaches to disaster relief. [ABSTRACT FROM AUTHOR]

This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances. [ABSTRACT FROM AUTHOR]

Theories of government spending driven by a common-pool problem in the fiscal revenues pool predict that greater districting of a political jurisdiction raises the scale of government. This paper presents evidence on this and related predictions from a cross section of city governments in the United States. The main finding is that, when other plausible determinants of government spending are controlled for, greater districting leads to a considerably greater scale of government activity. The results also show that at-large electoral systems do not, and forms of government that concentrate powers in the office of the executive do, break this relationship. [ABSTRACT FROM AUTHOR]

U.S. taxpayers funded $14.8 billion of health related research last year, four times the amount that was spent in 1970 in real terms. In this paper we evaluate the impact of these huge expenditures on the technological performance of the pharmaceutical industry. While it is very difficult to be precise about the payoffs from publicly funded research, we conclude from a survey of a wide variety of quantitative and qualitative academic studies that the returns from this investment have been large, and may be growing even larger. Public sector science creates new knowledge and new tools, and produces large numbers of highly trained researchers, all of which are a direct and important input to private sector research. But this is not a one way street: the downstream industry is closely linked with upstream institutions, and knowledge, materials, and people flow in both directions. One important contribution of public science is that it sustains an environment in which for-profit firms can conduct their own basic research, which in turn contributes to the global pool of knowledge. Measured quite narrowly in terms of its effect on private sector R&D, the rate of return to public funding of biomedical sciences may be as high as 30% per year. Large as this figure is, these calculations are likely an underestimate, since they fail to fully capture the wider impact of pharmaceutical innovation on health and well-being. Indeed, the best may be yet to come: the revolution in molecular biology that began in publicly funded laboratories 25 years ago -- and continues to be driven by the academic research -- promises dramatic advances in the treatment of disease. [ABSTRACT FROM AUTHOR]

Research on the distribution of income during the 1980s has identified a trend towards increasing inequality, which may be the continuation and acceleration of trends spanning several decades. This paper explores to what extent behavioral responses to the tax changes during the 1980s may also explain the rising inequality. The 1986 Tax Reform Act is used as a natural experiment to explore the roles played by both taxes and a variety of nontax factors. Our principal finding is that both tax rates and nontax factors appear to have had significant effects on relative income growth during the late 1980s. [ABSTRACT FROM AUTHOR]

It is a common notion in the theory of public finance that privately provided goods may be substituted for publicly provided goods, such as locks for more police and sprinkler systems for more firemen. Yet empirical studies of the demand for public goods have in general ignored such substitutes. For example, Theodore Bergstrom and Robert Goodman correctly note that the prices of private goods affect individual demand for public goods, p. 283, but in their empirical analysis they assume that these prices and the unit prices of public goods are the same in all communities. The possibility of public-private substitution has received some theoretical attention. John Head and Carl Shoup touch on this problem in their normative analysis of the proper identification of public, private, and "ambiguous" goods, based on each good's optimal allocation. And in his text, Shoup, p. 68, mentions the simultaneous provision of burglar alarms and police within the context of his discussion of public services. In another application to crime prevention, Henry Tulkens and Alex Jacquemin present a theoretical analysis which allows for the simultaneous provision of public and private protection. It is primarily in the area of education, however, that the public-private choice has received much positive analysis (see Mark Pauly, Yoram Barzel, Sam Peltzman, and Joseph Stiglitz). The purpose of this paper is to analyze the role of private substitutes for public services within the more general context of public sector decision making, and then to apply this analysis in an empirical analysis of the demand for protection against crime. Section I illustrates the importance of the private substitutes available for some local public services and describes the various forms of private protection. Section II presents a general analysis of the choice between private and public modes of provision. Section III illustrates this analysis with an application to the case of private protection against crime and presents estimates of a CES form of the production of security using data for U.S. states in 1970. The implications of these findings for rising expenditures by local governments are also noted. Section IV summarizes the analysis. [ABSTRACT FROM AUTHOR]

The article presents information on reports, documents and legislation on public finance in the U.S. The Bureau of the Census has prepared an "Abstract of Special Bulletins: Wealth, Debt, and Taxation, 1913," which is based upon seven bulletins dealing with: "Assessed Valuation of Property and Amounts and Rates of Levy: 1860-1912"; "National and State Indebtedness and Funds and Investments: 1870-1913"; "County and Municipal Indebtedness: 1913, 1902 and 1890; and Sinking Fund Assets: 1913"; "Taxation and Revenue Systems of State and Local Governments"; National and State Revenues and Expenditures: 1913 and 1903; and Public Properties of the States: 1913"; "County Revenues, Expenditures, and Public Properties: 1913"; and 1913"; and "Municipal Revenues, Expenditures, and Public Properties: 1913. The Ohio Legislative Reference Department has published a bulletin entitled Report of the Committee for an Investigation of Finances of Municipatities. Papers are grouped under the following headings: public expenditures; effect of high tax-rates; what other states are doing; and the remedy in Indiana.

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent declines in the government surplus and tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they 'normally' do to a large fiscal shock, aggregate output would have been lower and the surplus would not have changed by much. Our results do not bear directly on the desirability of the decline in tax rates or the surplus after 9/11. [ABSTRACT FROM AUTHOR]

The article presents commentary on the report "Government Asset and Liability Management in an Era of Vanishing Public Debt," by Henning Bohn, included within the issue. An overview of the report's conceptual basis is given and a review is provided of its three primary explorations into the potential treasury surplus, rent-seeking, and balance sheet analysis monetary policies adoptable by the United States. Comments on the clarity and methodology of the paper are included, along with discussion regarding the viability of its conclusion goals of a state-contingent Social Security tax-benefit policy.

Abstract: Economists advocate that the billions of public dollars spent on conservation be allocated to achieve the largest possible social benefit. This is “cost-effective conservation”—a process that incorporates both monetized benefits and costs. Though controversial, cost-effective conservation is poorly understood and rarely implemented by planners. Drawing from the largest publicly financed conservation programs in the United States, this paper seeks to improve the communication from economists to planners and to overcome resistance to cost-effective conservation. Fifteen practical lessons are distilled, including the negative implications of limiting selection with political constraints, using nonmonetized benefit measures or benefit indices, ignoring development risk, using incomplete cost measures, employing cost measures sequentially, and using benefit indices to capture costs. The paper highlights interrelationships between benefits and complications such as capitalization and intertemporal planning. The paper concludes by identifying the challenges at the research frontier, including incentive problems associated with adverse selection, additionality, and slippage. [Copyright &y& Elsevier]

This essay briefly reviews the state of knowledge about the government spending multiplier. Drawing on theoretical work, aggregate empirical estimates from the United States, as well as cross-locality estimates, I assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate: a temporary, deficit-financed increase in government purchases. I conclude that the multiplier for this type of spending is probably between 0.8 and 1.5. (JEL E23, E62, H50) [ABSTRACT FROM AUTHOR]

The world financial crisis, started by the collapse of the mortgage market in USA, gave rise to the deterioration of public finances in many European countries. The countries on which the impact was strong are Portugal, Ireland, Italy, Greece and Spain (or PIIGS). Already during 2010, Greece and Ireland would have both had to declare their bankruptcy but for the external financial aid. The purpose of the present paper is to highlight the causes that gave rise to the critical situation of the countries referred to as PIIGS, the scale of the phenomenon and the measures taken to improve the given situation. [ABSTRACT FROM AUTHOR]

In the last two decades, fiscal sustainability has been tested through the use of non-stationary time series analysis. Two different approximations can be found in the literature: first, a univariate approach that has focused on the stochastic properties of the stock of debt and, second, a multivariate one that has focused on the long-run properties of the flows of expenditures and revenues, i.e., in the stochastic properties of the deficit. In this paper we unify these approaches considering the stock-flow system that fiscal variables configure. Our approach involves working in an I(2) stochastic processes framework. Given the possibility of the existence of regime shifts in the sustainability of US deficit that the literature has pointed out, we develop a new statistic that can be applied to test several types of I(2) cointegration and multicointegration relationships allowing for regime shifts. To test for these kinds of changing long-run relationships we propose the use of a residual-based Dickey-Fuller class of statistic that accounts for one structural break. We show that consistent estimates of the break fraction can be obtained through the minimization of the sum of squared residuals when there is I(2) cointegration. The finite sample performance of the proposed statistic is investigated by Monte Carlo simulations. The econometric methodology is applied to assess whether the US fiscal deficit and debt are sustainable. Copyright © 2010 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]