Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/252017 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9500
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The price of a safe asset reflects not only the expected discounted future cash flows but also future service flows, since retrading allows partial insurance of idiosyncratic risk in an incomplete markets setting. This lowers the issuers' interest burden and allows the government to run a permanent (primary) deficit without ever paying back its debt. As idiosyncratic risk rises during recessions, so does the value of the service flows bestowing the safe asset with a negative ß. This resolves government debt valuation puzzles. Nevertheless, the government faces a "Debt Laffer Curve". The paper also has important implications for fiscal debt sustainability.
Subjects: 
safe asset
government debt
Debt Laffer Curve
Ponzi Scheme
fiscal capacity
I Theory of Money
r vs. g
Document Type: 
Working Paper
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