Government budget deficits and trade deficits Are present value constraints satisfied in long-term data?

We test whether long-term data from the U.S. and U.K. are consistent with the intertemporal government budget constraint and external borrowing constraint, both individually and simultaneously. A very strong test is provided by our focus on whether the present value constraints (PVCs) continue to hold despite unusual events, such as wars, that cause a structural break in the short-run dynamic behavior of the variables. We find that the PVCs hold over the whole sample period. The data also indicate that the PVCs continue to hold following events that cause a structural break in the short-run dynamics.