What Drives Variation in the U.S. Debt/Output Ratio? The Dogs that Didn't Bark
45 Pages Posted: 20 Sep 2021 Last revised: 9 May 2022
Date Written: September 16, 2021
Higher U.S. government debt/output ratios do not forecast higher future surpluses or lower real returns on Treasurys. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. The market valuation of Treasurys is surprisingly insensitive to the macro fundamentals. Instead, the future debt/output ratio accounts for most of the variation. Systematic surplus forecast errors may help to account for these findings. Since the start of the GFC, surplus projections have anticipated a large fiscal correction that failed to materialize.
Keywords: fiscal policy, bond pricing.
JEL Classification: G12, E62
Suggested Citation: Suggested Citation