Debt Sustainability When R – G &amp;lt; 0: No Free Lunch After All

Wijnbergen, Sweder van; Olijslagers, Stan; Vette, Nander de

doi:10.2139/ssrn.3736921

Cited by 4 publications

(1 citation statement)

References 48 publications

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“…We infer the expected return on a claim to equity from valuations in the stock market. There are many ways one could measure the expected return on stocks: from a vector autoregressive model, as in Jiang and others (2019); from survey expectations (Fernandez, Bañuls, and Acin 2021); or from option markets (Andersen, Fusari, and Todorov 2015;van Binsbergen, Brandt, and Koijen 2012), to name a few.…”

Section: Ib Discount Ratesmentioning

confidence: 99%

Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis

Jiang¹,

Lustig²,

Nieuwerburgh³

et al. 2022

eca

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We use discounted cash flow analysis to measure the projected fiscal capacity of the US federal government. We apply our valuation method to the Congressional Budget Office (CBO) projections for the US federal government's primary deficits between 2022 and 2052 and projected debt outstanding in 2052. The discount rate for projected cash flows and future debt must include a GDP or market risk premium in recognition of the risk associated with future surpluses. Despite current low interest rates, we find that US fiscal capacity is more limited than commonly thought. Because of the back-loading of projected primary surpluses, the duration of the surplus claim far exceeds the duration of the outstanding Treasury portfolio. This duration mismatch exposes the government to the risk of rising interest rates, which would trigger the need for higher tax revenue or lower spending. Reducing this risk by front-loading primary surpluses requires a major fiscal adjustment.1. See Lucas (2012) on the importance of proper risk adjustment when evaluating government policies.

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Section: Ib Discount Ratesmentioning

confidence: 99%

Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis

Jiang¹,

Lustig²,

Nieuwerburgh³

et al. 2022

eca

View full text Add to dashboard Cite

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Manufacturing Risk-free Government Debt

et al. 2020

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Governments face a trade-off between insuring bondholders and taxpayers. If the government fully insures bondholders by manufacturing risk-free zero-beta debt, then it cannot also insure taxpayers against permanent macroeconomic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government fully insures taxpayers against adverse macro shocks, then the debt becomes risky, at least as risky as unlevered equity claim. As the world's safe asset supplier, the U.

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