Persistent Government Debt and Aggregate Risk Distribution

Fisher College of Business Working Paper No. 2019-03-02

Charles A. Dice Center Working Paper No. 2019-2

73 Pages Posted: 29 Nov 2018 Last revised: 14 Apr 2020

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Steve Raymond

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 26, 2020

Abstract

When government debt is sluggish, consumption exhibits lower expected growth, more long-run uncertainty, and more long-run downside risk. Simultaneously, the risk premium on the consumption claim (Koijen et al. (2010), Lustig et al. (2013)) increases and features more positive (adverse) skewness. We rationalize these findings in an endogenous growth model in which fiscal policy is distortionary, the value of innovation depends on fiscal risk. Our model suggests that committing to a rapid reduction of the debt-to-output ratio can enhance the value of innovation, aggregate wealth, and welfare.

Keywords: Fiscal Policy, Endogenous Growth Risk, Asset Prices

JEL Classification: E62, G1, H2, H3

Suggested Citation

Croce, Mariano Massimiliano and Nguyen, Thien Tung and Raymond, Steve, Persistent Government Debt and Aggregate Risk Distribution (March 26, 2020). Fisher College of Business Working Paper No. 2019-03-02; Charles A. Dice Center Working Paper No. 2019-2. Available at SSRN: https://ssrn.com/abstract=3289075 or http://dx.doi.org/10.2139/ssrn.3289075

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Steve Raymond

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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