What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark

ABSTRACT A higher U.S. government debt‐to‐output (D‐O) ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current D‐O ratio. The market valuation of Treasurys is surprisingly insensitive...

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Bibliographic Details
Published in:The Journal of finance (New York) 2024-08, Vol.79 (4), p.2603-2665
Main Authors: JIANG, ZHENGYANG, LUSTIG, HANNO, VAN NIEUWERBURGH, STIJN, XIAOLAN, MINDY Z.
Format: Article
Language:English
Subjects:
Dogs
Economic crisis
Market value
Projections
Rates of return
Surpluses
Treasuries
Valuation
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Summary:ABSTRACT A higher U.S. government debt‐to‐output (D‐O) ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current D‐O ratio. The market valuation of Treasurys is surprisingly insensitive to macro fundamentals. Instead, the future D‐O ratio accounts for most of the variation because the D‐O ratio is highly persistent. Systematic surplus forecast errors may help account for these findings. Since the start of the Global Financial Crisis, surplus projections have anticipated a large fiscal correction that failed to materialize.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13363