Manufacturing Risk-free Government Debt

66 Pages Posted: 8 Jul 2020 Last revised: 26 Mar 2024

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: March 15, 2024

Abstract

Governments face a trade-off between insuring households who pay taxes and receive transfers and bondholders who finance cyclical government deficits against aggregate output risk. We analyze this trade-off in an incomplete-markets economy with idiosyncratic income risk and aggregate disaster risk. If the government manufactures risk-free zero-beta debt, then it cannot insure long-lived households against disasters by lowering tax rates or raising government spending. Households can only be insured over short horizons by backloading the aggregate risk through counter-cyclical debt issuance. As the world’s safe asset supplier, the U.S. has availed itself of strongly counter-cyclical debt issuance to provide more short-run insurance to its households.

Keywords: fiscal policy, bond pricing, disaster risk, convenience yields

JEL Classification: G12, E62

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Manufacturing Risk-free Government Debt (March 15, 2024). Available at SSRN: https://ssrn.com/abstract=3646430 or http://dx.doi.org/10.2139/ssrn.3646430

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

National Bureau of Economic Research (NBER) ( email )

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Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Singapore

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

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