Download This PaperWhat 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
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What Drives Variation in the U.S. Debt/Output Ratio? The Dogs that Didn't Bark
What Drives Variation in the U.S. Debt/Output Ratio? The Dogs that Didn't Bark
Date Written: September 16, 2021
Abstract
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
Hanno N. Lustig (Contact Author)
Stanford Graduate School of Business ( email )
Stanford GSB
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Stijn Van Nieuwerburgh
Columbia University Graduate School of Business ( email )
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HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/
Mindy Z. Xiaolan
University of Texas, Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
HOME PAGE: http://sites.google.com/view/mindyxiaolan