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Government Debt and the Returns to Innovation

Mariano Massimiliano Croce, Thiên Tung Nguyen, Steve Raymond and Lukas Schmid

No 12617, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross section of US stock returns, we show that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms; and (ii) higher levels of the debt-to-GDP ratio predict higher risk premia for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent productivity and economic growth. We propose a production-based asset pricing model with endogenous innovation and fiscal policy shocks that can rationalize key aspects of the empirical evidence. Our study highlights a novel and distinct risk channel shaping the link between government debt and future growth.

Keywords: Cross Section of Stock Returns; Fiscal Uncertainty; Government Debt; Government Debt; growth; predictability; R&D (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ino, nep-knm and nep-sbm
Date: 2018-01
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