Searching for nonlinear effects and fiscal sustainability in G-7 countries

Abstract

This article investigates the possibility of nonlinearities and sustainability in the fiscal policy of G-7 countries. A large number of studies using unit root tests have been conducted on fiscal sustainability and the effects of nonlinearities. However, a majority of these have given scant attention to the combination of structural change and the effect of the threshold. We improve Sollis's (2004) test and investigate nonlinear effects and fiscal sustainability. Empirical evidence supports the fact that G-7 countries excluding Japan have nonlinear effects and fiscal sustainability.

Notes

¹ Sollis (2004) developed a new unit root test that combined the unit root test of Enders and Granger (1998) with that of Leybourne et al. (1998).

² Sollis (2004) is not concerned with the unknown value of the threshold.

³ See, Leybourne et al. (1998) and Sollis (2004). Using a Monte Carlo simulation, Enders (2001) obtained the F statistic for the null hypothesis for ρ₁ = ρ₂ = 0 when the threshold is estimated using Chan's procedure.