Quantifying U.S. Treasury Investor Optimism
29 Pages Posted: 1 Mar 2021 Last revised: 14 Jun 2021
Date Written: January 19, 2021
When the government commits to a debt policy, the future value of government primary surpluses at all horizons is dictated by the debt dynamics under the risk-neutral measure. We compare the present discounted value of future surpluses implied by the U.S. federal government debt dynamics in a no-arbitrage bond pricing model to the PDV of actual government surpluses. Since the late 1990s, the debt-implied PDV of surpluses have consistently and persistently exceeded realized surpluses. They have also exceeded surplus forecasts resulting from tax and spending policy rules. U.S. Treasury investors appear to have been overly optimistic when assessing future surpluses.
Keywords: fiscal policy, debt sustainability, term structure, convenience yield
JEL Classification: H6, G1, E6
Suggested Citation: Suggested Citation