Manufacturing Risk-free Government Debt

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

No 27786, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Governments face a trade-off between insuring households who pay taxes and receive transfers and bondholders against aggregate output risk. Insulating bondholders by keeping the debt risk-free imposes tight restrictions on the expected primary surplus process and its covariance with aggregate shocks. Through counter-cyclical debt issuance, the government can protect taxpayers against adverse economic shocks over short horizons, but not over longer horizons. The restrictions imposed by risk-free debt on expected surpluses are rejected in US data. If the portfolio of U.S. Treasurys were risk-free, then Treasury investors would have been expecting large primary surpluses since the GFC. Such surpluses never materialized even though r

JEL-codes: F34 G12 H62 H63 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-fmk and nep-opm
Note: AP EFG IFM ME PE
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Citations: View citations in EconPapers (6)

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Working Paper: Manufacturing Risk-Free Government Debt (2021)
Working Paper: Manufacturing Risk-free Government Debt (2021)
Working Paper: Manufacturing Risk-Free Government Debt (2020)
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