Working Paper: CEPR ID: DP16082
Authors: Zhengyang Jiang; Hanno Lustig; Stijn van Nieuwerburgh; Mindy Xiaolan
Abstract: The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses areconsistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasurys are much larger than previously thought and/or U.S. Treasury markets have failed to enforce the no-bubble condition.
Keywords: fiscal policy; term structure; debt maturity; convenience yield
JEL Codes: E32; E62; G12; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market value of outstanding federal government debt (H63) | Expected present discounted value of primary surpluses (H68) |
| Tax revenues are procyclical (H29) | Government spending is countercyclical (E62) |
| Riskiness of surpluses (D81) | Wedge between the value of debt and the value of the surplus claim (G32) |
| Expected return on the debt portfolio (G12) | Observed yield on treasuries (E43) |
| Convenience yields (D11) | Valuation gap (D46) |
| Market valuations (G19) | High probability of future fiscal corrections (H68) |
| Investors' optimism about future surpluses (G31) | Misalignment with rational expectations (D84) |