Dynamic rational expectations models imply that the real value of debt in the hands of the public must be equal to the expected present-value of surpluses. We impose this equilibrium condition on an identified VAR and characterize the way in which the present-value support of debt varies across various types of fiscal policy shocks and between fiscal and non-fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. For some fiscal policy shocks, debt is supported almost entirely by changes in the present-value of surpluses, however, in the case of other fiscal policy shocks, surpluses fail to adjust and instead leave a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long – on the order of fifty years – while present-values calculated up to any finite horizon up to then fluctuate wildly, particularly following government spending and transfer shocks.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13425.
Length: Date of creation: Sep 2007 Date of revision: Handle: RePEc:nbr:nberwo:13425
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Paper
Hess Chung & Eric Leeper, 2007.
"What Has Financed Government Debt?,"
Caepr Working Papers
2007-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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Find related papers by JEL classification: E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007.
"ABCs (and Ds) of Understanding VARs,"
American Economic Review,
American Economic Association, vol. 97(3), pages 1021-1026, June.
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António Afonso & Ricardo M. Sousa, 2008.
"The Macroeconomic Effects of Fiscal Policy,"
Working Papers
2008/56, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
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Eric M. Leeper, 2009.
"Anchoring Fiscal Expectations,"
Caepr Working Papers
2009-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
[Downloadable!]