We introduce a new indicator of fiscal capacity—the “austerity threshold”: the debt-to-GDP level above which the government must raise fiscal surpluses to ensure debt safety.In a model with realistic risk premia, nominal rigidities, and an intermediary sector, calibrated to the U.S., we estimate this threshold at 189%. We highlight the roles of safety premia and intermediation-driven convenience yields. The threshold varies with the source of surpluses: spending cuts reduce inflation and allow low interest rates, while tax increases distort labor supply and raise inflation. Uncertainty over the austerity regime – spending cuts or tax increases – sharply lowers fiscal capacity. The expected austerity regime affects asset prices and macro outcomes even when debt-to-GDP is well below the threshold.

We measure the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds its balance sheet expansion mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates, and use these funds to finance asset purchases and bank lending. This arrangement exposes taxpayers in core countries to credit and currency risk without corresponding compensation. By comparing the cross-country distribution of NCB income to a counterfactual scenario without non-marketable intra-Eurozone claims, we document significant and persistent cross-country transfers in the Target2 system.

Fiscal policy is less understood in financial markets than monetary policy due to the lack of high-frequency shocks. I construct such shocks by tracking revisions to forward-looking deficit targets throughout the Congressional budget resolution and reconciliation process. The shocks are unpredictable yet move deficit forecasts. A 1% deficit-to-GDP shock raises 10-year yields by 2.3 bps, two-thirds through real rates. Deficit news raises term premiums and lowers Treasury convenience yields. Stock market effects combine discount rate and cash flow channels, with the latter dominating at the ZLB. Growth-sensitive industries respond positively, suggesting a fiscal multiplier that monetary policy offsets when unconstrained.