English, Article, Journal or magazine article edition: What Has Financed Government Debt? Eric M. Leeper; Hess Chung

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Bookmark: http://trove.nla.gov.au/version/67276
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • What Has Financed Government Debt?
Author
  • Eric M. Leeper
  • Hess Chung
Physical Description
  • preprint
Notes
  • Dynamic rational expectations models imply that the real value of debt in the hands of the public must be equal to the expected present-value of surpluses. We impose this equilibrium condition on an identified VAR and characterize the way in which the present-value support of debt varies across various types of fiscal policy shocks and between fiscal and non-fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. For some fiscal policy shocks, debt is supported almost entirely by changes in the present-value of surpluses, however, in the case of other fiscal policy shocks, surpluses fail to adjust and instead leave a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long – on the order of fifty years – while present-values calculated up to any finite horizon up to then fluctuate wildly, particularly following government spending and transfer shocks.
  • RePEc:nbr:nberwo:13425
  • Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data. First, we show that small VAR models of fiscal policy may not be invertible and that expanding the information set to include government debt has quantitatively important implications. Then we impose the present-value condition on an identified VAR and characterize the way in which the present-value support of debt varies across types of fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. Debt is supported almost entirely by changes in the present-value of surpluses for some fiscal shocks, but for other fiscal shocks surpluses fail to adjust, leaving a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long---on the order of 50 years or more.
  • fiscal policy, present-value restriction, taxes, government spending
  • RePEc:inu:caeprp:2007015
Language
  • English
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