Discussion paper

DP11576 A Macrofinance View of U.S. Sovereign CDS Premiums

Premiums on U.S. sovereign CDS have risen to persistently elevated levels since the financial crisis. In this paper, we ask whether these premiums reflect the probability of a U.S. fiscal default, namely a state in which budget balance can no longer be restored by further raising taxes or eroding the real value of debt by raising inflation. To that end, we develop an equilibrium macrofinance model of the U.S. economy, in which the fiscal and monetary policy stance jointly endogenously determine nominal debt, taxes, inflation and growth. While U.S. CDS cannot be valued using standard replication arguments, we show how in our equilibrium model, CDS premiums reflect endogenous risk adjusted fiscal default probabilities. A calibrated version of the model is quantitatively consistent with high premiums on U.S. sovereign CDS.


Chernov, M and L Schmid (2016), ‘DP11576 A Macrofinance View of U.S. Sovereign CDS Premiums‘, CEPR Discussion Paper No. 11576. CEPR Press, Paris & London. https://cepr.org/publications/dp11576