A wavelet analysis of US fiscal sustainability

In this paper, we reassess the relationship between primary deficit and lagged debt to GDP ratio (Bohn, 1998), totest for US debt sustainability over the period 1795–2012. Our analysis is rooted in the wavelet domain enablingthe detection of interesting patterns and otherwise hidden information. We find evidence of long term fiscal sustainabilitybut only up until 1995 and also we show that governments tend to respond more vigorously to budgetdeficits when the level of debt is high rather than low.