Conference Agenda

Is it possible to reconcile the procyclical Government surplus dynamics with the `safe asset status' of sovereign Debt? In an arbitrage-free market, if the aggregate debt value satisfies a transversality condition that rules out `bubbles', then it should equal the present value of future government surpluses. This relation seems to fail when the surplus process is calibrated to historical data in the US (Jiang, Lustig, van Nieuwerburgh, and Xiolan (2022)). However, we show that when the government issues only safe bonds in an incomplete but arbitrage-free market, then not all surplus processes are admissible in the sense that they are consistent with both the dynamic budget constraint and a transversality condition. We propose a class of admissible surplus processes that matches empirical properties of US government spending and tax claims without generating a `debt valuation puzzle.'

Like US monetary policy, US fiscal policy has a global footprint: deteriorations in the US fiscal condition i) coincide with depressed global risky asset prices and ii) predict higher future global equity returns moving forward. These results are not spanned by i) the US monetary policy, ii) other fiscal variables or iii) local or global business cycles. To explain these results, I advance a novel fiscal mechanism that emphasises the special US role as the global innovation leader. This empowers the US fiscal policy with a large international transmission across the global innovation network, enabling it to influence i) foreign growth, ii) foreign fiscal conditions, iii) foreign policy uncertainty and consequently iv) global risk-premia.

We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and have evolved significantly over time. Focusing on the United States, we estimate the yield elasticity of demand across sectors using instrumental variables constructed from monetary policy surprises. Our estimates point to a 14\% increase in the demand by non-central-bank players for a 1 percentage point increase in long-term yields. Hence, a counterfactual reduction in the central bank balance sheet through quantitative tightening of around \$266 billion increases long-term yields by 10 basis points. We find commercial banks, foreign private investors, pension funds, investment funds, and insurance companies to be the sectors whose demand is most sensitive to changes in long-term yields, but to varying degrees. The foreign official sector by contrast has price-inelastic demand. Our results imply compositional shifts towards more price elastic players as central banks normalize balance sheets with important implications for fiscal policy and financial stability.