Working Paper: NBER ID: w13425
Authors: Hess Chung; Eric M. Leeper
Abstract: Dynamic rational expectations models imply that the real value of debt in the hands of the public must be equal to the expected present-value of surpluses. We impose this equilibrium condition on an identified VAR and characterize the way in which the present-value support of debt varies across various types of fiscal policy shocks and between fiscal and non-fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. For some fiscal policy shocks, debt is supported almost entirely by changes in the present-value of surpluses, however, in the case of other fiscal policy shocks, surpluses fail to adjust and instead leave a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long - on the order of fifty years - while present-values calculated up to any finite horizon up to then fluctuate wildly, particularly following government spending and transfer shocks.
Keywords: No keywords provided
JEL Codes: E60; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending shock (E62) | Primary surplus (H62) |
| Tax shock (H26) | Primary surplus (H62) |
| Spending shock (E62) | Primary surplus (H62) |
| Transfer shock (F16) | Primary surplus (H62) |
| Government debt innovations (H63) | Primary surplus (H62) |
| Real interest rate (E43) | Primary surplus (H62) |
| Transfer shock (F16) | Real interest rate (E43) |