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

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

No 29902, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H6 H63 H68 (search for similar items in EconPapers)
Date: 2022-04
Note: AP ME PE
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published as Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2022. "Measuring US Fiscal Capacity Using Discounted Cash Flow Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 157-229.

Downloads: (external link)
http://www.nber.org/papers/w29902.pdf (application/pdf)

Related works:
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29902

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29902

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().