Working Paper: CEPR ID: DP12617
Authors: Mariano Massimiliano Croce; Thin Tung Nguyen; Steve Raymond; Lukas Schmid
Abstract: Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross section of US stock returns, we show that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms; and (ii) higher levels of the debt-to-GDP ratio predict higher risk premia for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent productivity and economic growth. We propose a production-based asset pricing model with endogenous innovation and fiscal policy shocks that can rationalize key aspects of the empirical evidence. Our study highlights a novel and distinct risk channel shaping the link between government debt and future growth.
Keywords: government debt; fiscal uncertainty; cross section of stock returns; predictability; R&D growth
JEL Codes: E22; E62; H30; O33; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government debt (H63) | expected returns for innovation-intensive firms (O31) |
| debt-to-GDP ratio (dgdp) (H60) | higher risk premia for high R&D firms (O31) |
| increase in dgdp (E20) | higher future aggregate stock returns (G17) |
| increase in expected excess return of high R&D portfolio (G31) | declines in output and productivity growth (O49) |
| government debt (H63) | reallocation of investment towards physical capital (E22) |
| government debt (H63) | dynamics of tax rates (H29) |
| dynamics of tax rates (H29) | corporate investment and innovation (O31) |