Debt as Safe Asset

Markus Brunnermeier, Sebastian, Sannikov, Yuliy Merkel and Sebastian Merkel

No 9500, CESifo Working Paper Series from CESifo

Abstract: The price of a safe asset reflects not only the expected discounted future cash flows but also future service flows, since retrading allows partial insurance of idiosyncratic risk in an incomplete markets setting. This lowers the issuers’ interest burden and allows the government to run a permanent (primary) deficit without ever paying back its debt. As idiosyncratic risk rises during recessions, so does the value of the service flows bestowing the safe asset with a negative ß. This resolves government debt valuation puzzles. Nevertheless, the government faces a “Debt Laffer Curve”. The paper also has important implications for fiscal debt sustainability.

Keywords: safe asset; government debt; Debt Laffer Curve; Ponzi Scheme; fiscal capacity; I Theory of Money; r vs. g (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp9500.pdf (application/pdf)

Related works:
Working Paper: Debt as Safe Asset (2022)
Working Paper: Debt as Safe Asset (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9500

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().