The U.S. Public Debt Valuation Puzzle
68 Pages Posted: 4 Mar 2019 Last revised: 16 Feb 2022
Date Written: October 10, 2019
The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the U.S. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasurys may be mispriced.
Keywords: government debt maturity, fiscal policy, term structure, interest rate risk
JEL Classification: E44, E62, G12, H6
Suggested Citation: Suggested Citation