The U.S. Public Debt Valuation Puzzle
71 Pages Posted: 24 Dec 2019
There are 2 versions of this paper
The U.S. Public Debt Valuation Puzzle
Date Written: December 2019
Abstract
The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. Bond investors fail to impose this no-arbitrage restriction in the U.S., resulting in a government debt valuation puzzle. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. Under a realistic asset pricing model, this risk in surpluses creates a wedge of 299% of GDP between the value of debt and that the surplus claim, and implies an expected return on the debt portfolio that far exceeds the observed yield on Treasuries.
Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Suggested Citation: Suggested Citation
Mindy Z. Xiaolan
University of Texas, Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
HOME PAGE: http://sites.google.com/view/mindyxiaolan
Here is the Coronavirus
related research on SSRN
The U.S. Public Debt Valuation Puzzle
This is a National Bureau of Economic Research Paper. NBER charges a fee of $5.00 for this paper.
File name: nber.pdf
Size: 0K
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.
