The U.S. Public Debt Valuation Puzzle - Hanno LUSTIG
Speaker : Hanno LUSTIG
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 tax revenues and government spending make the surplus claim risky. Under a realistic asset pricing model, this risk in surpluses creates a wedge of 287% of GDP between the value of debt and that the surplus claim, and implies an expected return on the debt portfolio that far exceeds the observed yield on Treasuries.