What Determines the Government’s Funding Costs when r=g? Unpleasant Fiscal Asset Pricing Arithmetic

9 Pages Posted: 29 Mar 2021 Last revised: 21 Apr 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

Date Written: March 1, 2021

Abstract

Using MBA textbook finance, we look at three simple examples to illustrate why the r-g measure of the fiscal cost of deficits is incomplete. We start by considering the case of risky government debt. Second, we consider the case of risk-free debt. Third, we allow for convenience yields. In each of these cases, Blanchard’s gap is incomplete at best. Fundamentally, the government’s cost of funding is determined by the riskiness of its spending, its tax revenue and, if relevant, the seigniorage revenue.

Keywords: MMT, Fiscal Theory of the Price Level

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., What Determines the Government’s Funding Costs when r=g? Unpleasant Fiscal Asset Pricing Arithmetic (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3795680 or http://dx.doi.org/10.2139/ssrn.3795680

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 )

Stanford GSB
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Stanford, CA California 94305-6072
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3108716532 (Phone)

National Bureau of Economic Research (NBER)

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Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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New York, NY New York 10027
United States

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

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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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