Persistent Government Debt and Aggregate Risk Distribution

Mariano Croce, Thien Nguyen and Steve Raymond

No 13922, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: When government debt is sluggish, consumption exhibits lower expected growth, more long-run uncertainty, and more long-run downside risk. Simultaneously, the risk premium on the consumption claim (Koijen et al. (2010), Lustig et al. (2013)) increases and features more positive (adverse) skewness. We rationalize these fi ndings in an endogenous growth model in which fi scal policy is distortionary, the value of innovation depends on fiscal risk, and the representative agent is sensitive to the resulting distribution of consumption risk. Our model suggests that committing to a rapid reduction of the debt-to-output ratio can enhance the value of innovation, aggregate wealth, and welfare.

Keywords: Fiscal policy; Endogenous growth risk; Asset prices (search for similar items in EconPapers)
JEL-codes: E62 G1 H2 H3 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-mac and nep-ore
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