Manufacturing Risk-free Government Debt

Stijn Van Nieuwerburgh, Zhengyang Jiang, Hanno Lustig and Mindy Xiaolan

No 16304, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of whether output shocks are permanent or temporary. Permanent shocks impute long-run output risk to the debt while transitory shocks impute interest rate risk, all of which must be offset through taxation to keep the debt safe. Conversely, if governments insure taxpayers against adverse macro shocks, then the debt becomes risky. Convenience yields on government debt temporarily alleviate the trade-off.

Keywords: Fiscal policy; Term structure; Debt maturity; Convenience yield (search for similar items in EconPapers)
JEL-codes: E62 G12 (search for similar items in EconPapers)
Date: 2021-06
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Related works:
Working Paper: Manufacturing Risk-Free Government Debt (2021)
Working Paper: Manufacturing Risk-Free Government Debt (2020)
Working Paper: Manufacturing Risk-free Government Debt (2020)
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