What Determines the Government's Funding Costs When r=g? Unpleasant Fiscal Asset Pricing Arithmetic

Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh and Mindy Xiaolan
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Zhengyang Jiang: Northwestern University
Hanno Lustig: Stanford GSB
Mindy Xiaolan: U.T. Austin

Research Papers from Stanford University, Graduate School of Business

Abstract: Using MBA textbook finance, we look at three simple examples to illustrate why the r-g measure of the fiscal cost of deficits is incomplete. We start by considering the case of risky government debt. Second, we consider the case of risk-free debt. Third, we allow for convenience yields. In each of these cases, Blanchard’s gap is incomplete at best. Fundamentally, the government’s cost of funding is determined by the riskiness of its spending, its tax revenue and, if relevant, the seigniorage revenue.

Date: 2021-03
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Citations: View citations in EconPapers (4)

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https://dx.doi.org/10.2139/ssrn.3795680

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3947

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