Working Paper: NBER ID: w26090
Authors: John H. Cochrane
Abstract: The market value of government debt equals the present discounted value of primary surpluses. Applying present value decompositions from asset pricing to this valuation equation, I find that half of the variation in the market value of debt to GDP ratio corresponds to varying forecasts of future primary surpluses, and half to varying discount rates. Variation in expected growth rates is unimportant.
Keywords: government debt; debt-to-GDP ratio; primary surpluses; discount rates
JEL Codes: G12; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected future primary surpluses (H68) | market value of government debt (H63) |
| discount rates (E43) | market value of government debt (H63) |
| expected growth (O40) | market value of government debt (H63) |
| expected future primary surpluses (H68) | debt-to-GDP ratio (H68) |
| discount rates (E43) | debt-to-GDP ratio (H68) |
| market value of government debt (H63) | debt-to-GDP ratio (H68) |