Manufacturing Risk-Free Government Debt

68 Pages Posted: 14 Jul 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

hlustig@stanford.edu 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; New York University (NYU)

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: June 2021

Abstract

Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of whether output shocks are permanent or temporary. Permanent shocks impute long-run output risk to the debt while transitory shocks impute interest rate risk, all of which must be offset through taxation to keep the debt safe. Conversely, if governments insure taxpayers against adverse macro shocks, then the debt becomes risky. Convenience yields on government debt temporarily alleviate the trade-off.

JEL Classification: E62, G12

Suggested Citation

Jiang, Zhengyang and Lustig, hlustig@stanford.edu and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Manufacturing Risk-Free Government Debt (June 2021). CEPR Discussion Paper No. DP16304, Available at SSRN: https://ssrn.com/abstract=3886777

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/

Hlustig@stanford.edu Lustig

Stanford University

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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New York University (NYU) ( 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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