Manufacturing Risk-Free Government Debt

68 Pages Posted: 3 Mar 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

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

Hanno Lustig

Stanford University

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 3 versions of this paper

Date Written: 2021

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.

JEL Classification: E620, F340, G120

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Manufacturing Risk-Free Government Debt (2021). CESifo Working Paper No. 8902, Available at SSRN: https://ssrn.com/abstract=3796649 or http://dx.doi.org/10.2139/ssrn.3796649

Zhengyang Jiang (Contact Author)

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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hanno Lustig

Stanford University

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

3022 Broadway
Uris Hall 809
New York, NY New York 10027
United States

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

ABFER ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
211
PlumX Metrics