events) than is contained in past values of the expenditure series ( Ghosh (1995) ). Under the null hypothesis that equation (1) holds, and so the budget surplus equals the discounted value of future changes in government expenditure (given the government’s information set), then the surplus should take into account this additional information and so Granger-cause changes in government spending. The second testable implication of equation (1) is that the smoothed budget surplus should be stationary. Assuming that g t is I (1), then Δ g t will be I (0); since
.088 Note: The dependent variable is the cyclically adjusted primary balance (CAPB) as defined in Section III . Robust standard errors, clustered at the country level, are reported in brackets. A constant is included in each regression, but not shown in the table. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively. The composition of fiscal adjustment, presented in Table 3 , is consistent with long-term debt sustainability, but expenditure policies exhibit a procyclical bias . Using the cyclically adjusted revenue and expenditure series