Government debt and risk premia

Yang Liu

Journal of Monetary Economics, 2023, vol. 136, issue C, 18-34

Abstract: Risk premia increase with government debt. Debt-to-GDP ratios positively predict stock returns at short and long horizons in the U.S. and other advanced economies. Higher debt is also associated with higher bond premia and lower risk-free rates. Major government debt theories (liquidity, safety, crowding out) either do not address or are inconsistent with these findings. New evidence suggests that the increased risk premia provide compensation for larger fiscal risk; during periods of elevated debt, fiscal policy becomes more uncertain and less effective and can lead to debt crises. I quantify these mechanisms in an equilibrium model.

Keywords: Government debt; Risk premia; Fiscal policy risk (search for similar items in EconPapers)
JEL-codes: E62 G12 G17 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:136:y:2023:i:c:p:18-34

DOI: 10.1016/j.jmoneco.2023.01.009

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