Discussion Paper Details

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Title: The U.S. Public Debt Valuation Puzzle

Author(s): Zhengyang Jiang, Hanno Lustig, Stijn van Nieuwerburgh and Mindy Xiaolan

Publication Date: April 2021

Keyword(s): Convenience Yield, debt maturity, Fiscal policy and term structure

Programme Area(s): Financial Economics, Macroeconomics and Growth and Public Economics

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 are consistent 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.

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Bibliographic Reference

Jiang, Z, Lustig, H, van Nieuwerburgh, S and Xiaolan, M. 2021. 'The U.S. Public Debt Valuation Puzzle'. London, Centre for Economic Policy Research.