The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S....

Governments face a trade-off between insuring bondholders and taxpayers. If the government decides to fully insure bondholders by manufacturing risk-free debt, then it cannot insure taxpayers against permanent macro-economic shocks over long horizons. Instead, taxpayers will pay more in taxes in...

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. Bond investors fail to impose this no-arbitrage restriction in the U.S., resulting in a government debt valuation puzzle. Both cyclical and long-run dynamics of...

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. Bond investors fail to impose this no-arbitrage restriction in the U.S., resulting in a government debt valuation puzzle. Both cyclical and long-run dynamics of...

Governments face a trade-off between insuring bondholders and insuring taxpayers against output risk. If they insure bondholders by manufacturing risk-free zero-beta debt, then their capacity to insure taxpayers by lowering tax rates or raising government spending during recessions is limited....

This paper analyzes bond convenience yields in a currency union. The intertemporal government budget constraint requires member countries' bond convenience yields and default spreads to adjust in response to shocks to their government surpluses. In the data, adjustments to convenience yields...

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...

Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of...

Governments face a trade-off between insuring bondholders and taxpayers. If the government fully insures bondholders by manufacturing risk-free zero-beta debt, then it cannot also insure taxpayers against permanent macroeconomic shocks over long horizons. Instead, taxpayers will pay more in...

If the U.S. is on a fiscally sustainable path, then higher U.S. government debt/output ratios should reliably predict higher future surpluses or lower real returns on Treasurys. We find no evidence for this. Neither future cash flows nor discount rates account for the variation in the current...