Persistent Government Debt and Aggregate Risk Distribution

66 Pages Posted: 20 Aug 2019

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

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

Steve Raymond

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

Multiple version iconThere are 3 versions of this paper

Date Written: August 2019

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, and the representative agent is sensitive to the resulting distribution of consumption 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: asset prices, Endogenous Growth Risk, Fiscal policy

JEL Classification: E62, G1, H2, H3

Suggested Citation

Croce, Mariano Massimiliano and Raymond, Steve, Persistent Government Debt and Aggregate Risk Distribution (August 2019). CEPR Discussion Paper No. DP13922, Available at SSRN: https://ssrn.com/abstract=3439477

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

Steve Raymond

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

Chapel Hill, NC 27599
United States

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