What Has Financed Government Debt?

Hess Chung and Eric Leeper

No 13425, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Dynamic rational expectations models imply that the real value of debt in the hands of the public must be equal to the expected present-value of surpluses. We impose this equilibrium condition on an identified VAR and characterize the way in which the present-value support of debt varies across various types of fiscal policy shocks and between fiscal and non-fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. For some fiscal policy shocks, debt is supported almost entirely by changes in the present-value of surpluses, however, in the case of other fiscal policy shocks, surpluses fail to adjust and instead leave a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long - on the order of fifty years - while present-values calculated up to any finite horizon up to then fluctuate wildly, particularly following government spending and transfer shocks.

JEL-codes: E60 E62 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pbe
Note: EFG
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Citations: View citations in EconPapers (86)

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Working Paper: What Has Financed Government Debt? (2007)
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