The public discount rate and the uncertain budgetary flows
Public investment in infrastructure and the like do not usually yield direct pecuniary returns to the public exchequer. Instead public capital leads to increases in factor productivity in the private economy. This paper argues that government typically shares in the latter gains via the tax-expenditure policies. Consequently the discount rate relevant for the investment is ultimately the same rate, as that required for valuing the future gains. However, it is important to note that these productivity gains are subject to aggregate economic shocks. From the perspectives of a counter factual experiment whereby the risky revenue flows serve as collateral for public borrowing, one may derive the risk discount rate that the capital market would set. This paper applies the above methodology to the United States, uses budget data for the period, 1950-1995, and shows that while the risk discount would typically exceed the risk free rate, it remains well below that facing a private investor. The intuition here is that the portfolio of assets embedded in the state’s revenue claims provides additional diversification than is available through financial markets. Consequently even investors holding well-diversified stock portfolios may legitimately view claims on state revenue as vehicles for further risk shifting.
(This abstract was borrowed from another version of this item.)
|Date of creation:||01 Jan 1998|
|Contact details of provider:|| Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark|
Phone: 38 15 25 75
Fax: 38 15 34 99
Web page: http://www.cbs.dk/departments/econ/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:hhs:cbsnow:1998_015. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lars Nondal)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.