Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits.

This paper extends previous tests of intertemporal budget balance and present value relationships by expanding the set of allowable deficit processes and by deriving a testable condition that is sufficient to ensure intertemporal budget balance as long as the expected discount rate is strictly positive. Using these tests, the authors find that both the postwar federal budget deficit process and the process governing accumulation of U.S. assets by foreigners are consistent with intertemporal budget balance. Copyright 1991 by Ohio State University Press.