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Persistent Government Debt and Aggregate Risk Distribution

Author

Listed:
  • Mariano Max Croce
  • Thien T. Nguyen
  • Steve Raymond
Abstract
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.

Suggested Citation

  • Mariano Max Croce & Thien T. Nguyen & Steve Raymond, 2019. "Persistent Government Debt and Aggregate Risk Distribution," NBER Working Papers 26177, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26177
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    References listed on IDEAS

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G1 - Financial Economics - - General Financial Markets
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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