2022, Long-Term Asset Management Keynote, Stijn Van Nieuwerburgh, "Fiscal Capacity: An Asset Pricing Perspective"
Presenter
In the last 15 years, the ratio of outstanding US federal government debt to GDP has more than doubled, but falling nominal and real interest rates have reduced the ratio of government interest payments to GDP. These divergent trends have renewed a long-term debate about the federal government's long-term fiscal capacity.
In a keynote address delivered at the April 8 meeting of the NBER's Long Term Asset Management Project, research associate Stijn Van Nieuwerburgh of Columbia University analyzed the question of fiscal capacity from an asset pricing perspective. He discussed his research finding that, because federal tax revenues tend to decline during periods of weak economic activity, which coincide with poor returns in asset markets, while federal spending tends to rise during these periods, investors should apply a substantial risk premium in discounting future cash flows associated with net federal deficits. This insight implies that federal fiscal capacity is more limited than standard, risk-neutral calculations suggest.
Supported by Norges Bank Investment Management grant #NFI 2969-39117