Fiscal Re-Adjustments in the U.S : A Non-Linear Time Series Analysis

We model the joint process for real per capita U.S. federal government spending and tax revenues as a Threshold Vector Error Correction. We find evidence that fiscal authorities will intervene to reduce real per capita deficit only when it reaches a certain threshold. We also find that fiscal re-adjustment takes place only through spending cuts. A further empirical support to the non-linear dynamics underlying the U.S. fiscal process is given by the superior performance of the non-linear model in terms of out-of-sample conditional forecasting of the government spending process