Manufacturing Risk-free Government Debt

66 Pages Posted: 8 Jul 2020 Last revised: 5 Feb 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

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 2 versions of this paper

Date Written: December 14, 2020

Abstract

Governments face a trade-off between insuring bondholders and taxpayers. If the government fully insures bondholders by manufacturing risk-free zero-beta debt, then it cannot also insure taxpayers against permanent macroeconomic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government fully insures taxpayers against adverse macro shocks, then the debt becomes risky, at least as risky as unlevered equity claim. As the world's safe asset supplier, the U.S. appears to have escaped this trade-off thus far, whereas the U.K. has not.

Keywords: fiscal policy, bond pricing

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 (December 14, 2020). 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/

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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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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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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