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What Has Financed Government Debt?

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  • Hess Chung
  • Eric M. Leeper

Abstract

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.

Suggested Citation

  • Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13425
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    More about this item

    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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