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Fiscal Capacity: An Asset Pricing Perspective

Author

Listed:
  • Zhengyang Jiang

    (Finance Department, Kellogg School of Management, Northwestern University, Evanston, Illinois, USA)

  • Hanno Lustig

    (National Bureau of Economic Research, Cambridge, Massachusetts, USA)

  • Stijn Van Nieuwerburgh

    (Department of Finance, Columbia Business School, Columbia University, New York, New York, USA)

  • Mindy Z. Xiaolan

    (McCombs School of Business, The University of Texas at Austin, Austin, Texas, USA)

Abstract

This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature.

Suggested Citation

  • Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2023. "Fiscal Capacity: An Asset Pricing Perspective," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 197-219, November.
    • Handle: RePEc:anr:refeco:v:15:y:2023:p:197-219
    DOI: 10.1146/annurev-financial-110921-103651
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    Citations

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    Cited by:

    1. Vladimir Andric & Dusko Bodroza & Mihajlo Djukic, 2024. "A Commentary on US Sovereign Debt Persistence and Nonlinear Fiscal Adjustment," Mathematics, MDPI, vol. 12(20), pages 1-33, October.

    More about this item

    Keywords

    fiscal policy; term structure; debt maturity; convenience yield;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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