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Discussion Paper Details

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Title: Government Debt and the Returns to Innovation

Author(s): Mariano Massimiliano Croce, Thi�n Tung Nguyen, Steve Raymond and Lukas Schmid

Publication Date: January 2018

Keyword(s): Cross Section of Stock Returns, Fiscal Uncertainty, Government Debt, Government Debt, growth, predictability and R&D

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Croce, M, Nguyen, T, Raymond, S and Schmid, L. 2018. 'Government Debt and the Returns to Innovation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12617