A Macrofinance View of U.S. Sovereign CDS Premiums

Mikhail Chernov, Lukas Schmid and Andres Schneider

Journal of Finance, 2020, vol. 75, issue 5, 2809-2844

Abstract: Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.

Date: 2020
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Citations: View citations in EconPapers (15)

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https://doi.org/10.1111/jofi.12948

Related works:
Working Paper: A Macrofinance View of U.S. Sovereign CDS Premiums (2016)
Working Paper: A macrofinance view of US Sovereign CDS premiums (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:75:y:2020:i:5:p:2809-2844

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