Working Paper: NBER ID: w26583
Authors: Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan
Abstract: The government budget constraint ties the market value of government debt to the expected risk-adjusted present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the U.S. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasurys may be mispriced.
Keywords: US Public Debt; Valuation Puzzle; Fiscal Capacity; Treasury Bonds
JEL Codes: E43; E62; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market value of government debt (H63) | expected risk-adjusted present discounted value of current and future primary surpluses (H68) |
| cyclical nature of tax revenues and government spending (E62) | risk in surplus claims (G33) |
| risk in surplus claims (G33) | yields on Treasury bonds (E43) |
| covariance of future surpluses with stochastic discount factor (D15) | government’s fiscal capacity (E62) |
| debt-to-GDP ratio exceeds model-implied upper bound (H68) | misforecast future surpluses (E17) |
| market value of government debt (H63) | mispricing of U.S. Treasuries (G19) |