Debt as Safe Asset

Markus Brunnermeier, Sebastian A. Merkel and Yuliy Sannikov

No 29626, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The price of a safe asset reflects not only the expected discounted future cash flows but also future service flows, since retrading allows partial insurance of idiosyncratic risk in an incomplete markets setting. This lowers the issuers' interest burden and allows the government to run a permanent (primary) deficit without ever paying back its debt. As idiosyncratic risk rises during recessions, so does the value of the service flows bestowing the safe asset with a negative beta. This resolves government debt valuation puzzles. Nevertheless, the government faces a “Debt Laffer Curve”. The paper also has important implications for fiscal debt sustainability.

JEL-codes: E44 G11 G12 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-mac and nep-rmg
Note: AP EFG ME
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Citations: View citations in EconPapers (2)

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Working Paper: Debt as Safe Asset (2021)
Working Paper: Debt as Safe Asset (2021)
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