Is there a bubble component in government debt? New international evidence

Using the debt-to-GDP ratios of the Group of Seven (G-7) plus Denmark and Finland, this paper revisits the sustainability of government debt. To this end, we employ the right-tailed unit root test, the smooth-break and the momentum threshold autoregressive (MTAR) unit root tests, respectively, under considerations that the government debt might contain bubble component and structural breaks. Among the main results, it is found that the debt-to-GDP ratios are mildly explosive based on the right-tailed unit root test. The results of the smooth-break unit root tests and the MTAR approach echo the results of the traditional unit root test, indicating that the debt-to-GDP ratios are not sustained. Generally speaking, the empirical evidences of this study indicate that the government debts of these advanced countries might not be sustainable, implying that the governments of these countries are required to balance their budgets intertemporally by setting the current value of the debts equal to the discounted sum of expected future surpluses.