Short and Long-Run Dynamics of Expenditures and Revenues and the Government Budget Constraint: Further Evidence

Abstract

This paper examines the long-run relationship between government expenditures and receipts (inclusive of the federal and state and local), We include GDP as a control variable in order to see if the adjustment to long-run equilibrium takes place between expenditures and revenues or between either fiscal variable and GDP. We find strong support for the existence of long-run relationship between expenditures and revenues. The cointegration and error correction results also reveal that the two fiscal variables adjust to each other. (H62, E62)