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What Has Financed Government Debt?


Eric M. Leeper


Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER); Monash University, Department of Economics

Hess Chung


Indiana University Bloomington - Department of Economics

September 10, 2007

CAEPR Working Paper No. 2007-015

Abstract:     
Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data. First, we show that small VAR models of fiscal policy may not be invertible and that expanding the information set to include government debt has quantitatively important implications. Then we impose the present-value condition on an identified VAR and characterize the way in which the present-value support of debt varies across types of fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. Debt is supported almost entirely by changes in the present-value of surpluses for some fiscal shocks, but for other fiscal shocks surpluses fail to adjust, leaving a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long - on the order of 50 years or more.

Number of Pages in PDF File: 40

Keywords: fiscal policy, present-value restriction, taxes, government spending

JEL Classification: E6

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Date posted: September 11, 2007  

Suggested Citation

Leeper, Eric M. and Chung, Hess, What Has Financed Government Debt? (September 10, 2007). CAEPR Working Paper No. 2007-015. Available at SSRN: http://ssrn.com/abstract=1013405 or http://dx.doi.org/10.2139/ssrn.1013405

Contact Information

Eric Michael Leeper (Contact Author)
Indiana University at Bloomington - Department of Economics ( email )
304 Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-9157 (Phone)
812-855-3736 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Monash University, Department of Economics ( email )
Wellington Road
Clayton, Victoria 3168
Australia
Hess Chung
Indiana University Bloomington - Department of Economics ( email )
304 Wylie Hall
Bloomington, IN 47405-6620
United States
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