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

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  • ZHENGYANG JIANG
  • HANNO LUSTIG
  • STIJN VAN NIEUWERBURGH
  • MINDY Z. XIAOLAN

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.

Suggested Citation

  • Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2024. "What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark," Journal of Finance, American Finance Association, vol. 79(4), pages 2603-2665, August.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:4:p:2603-2665
    DOI: 10.1111/jofi.13363
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