NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Persistent Government Debt and Aggregate Risk Distribution

Mariano Max Croce, Thien T. Nguyen, Steve Raymond

NBER Working Paper No. 26177
Issued in August 2019
NBER Program(s):Asset Pricing Program, Public Economics Program

When government debt is sluggish, consumption exhibits lower expected growth, more long-run uncertainty, and more long-run downside risk. Simultaneously, the risk premium on the consumption claim (Koijen et al. (2010), Lustig et al. (2013)) increases and features more positive (adverse) skewness. We rationalize these findings in an endogenous growth model in which fiscal policy is distortionary, the value of innovation depends on fiscal risk, and the representative agent is sensitive to the resulting distribution of consumption risk. Our model suggests that committing to a rapid reduction of the debt-to-output ratio can enhance the value of innovation, aggregate wealth, and welfare.

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Document Object Identifier (DOI): 10.3386/w26177

 
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