Measuring U.S. Fiscal Capacity using Discounted Cash Flow Analysis

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

No 17341, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We use discounted cash flow analysis to measure a country's fiscal capacity. Crucially, the discount rate applied to projected cash flows includes a GDP risk premium. We apply our valuation method to the CBO's projections for the U.S. federal government's deficit between 2022 and 2051 and debt in 2051. In spite of low rates, our current measure of U.S. fiscal capacity is lower than the debt/GDP ratio. Because of the backloading of projected surpluses, the duration of the surplus claim far exceeds the duration of the outstanding Treasury portfolio. This duration mismatch exposes the government to the risk of rising rates, which would trigger the need for higher tax revenue or lower spending. Reducing this risk by front-loading the surpluses also requires major fiscal adjustment.

Keywords: Fiscal capacity; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 G12 (search for similar items in EconPapers)
Date: 2022-05
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Journal Article: Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis (2022)
Working Paper: Measuring U.S. Fiscal Capacity Using Discounted Cash Flow Analysis (2022)
Working Paper: Measuring U.S. Fiscal Capacity using Discounted Cash Flow Analysis (2022)
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