Public Debt, Consumption Growth, and the Slope of the Term Structure. (10th November 2021)

• Record Type: Journal Article
• Authors: Nguyen, Thien T
• Editors: Koijen, Ralph
• Is Part Of: Review of financial studies. Volume 35:Number 8(2022)
• Page Start: 3742
• Page End: 3776
• Publication Date: 2021-11-10
• Subjects: E43 -- E44 -- E62 -- G12 -- G18 -- H32; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhab123
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: The debt-to-GDP ratio negatively predicts cumulative nominal consumption growth up to a 10-year horizon, resulting from the ratio's ability to forecast lower inflation and real growth. Moreover, the debt-to-GDP ratio is positively associated with yield spreads. I rationalize these facts in a model in which positive shocks to government debt cause lower inflation and growth, making bonds attractive assets. Furthermore, because longer-term bonds are less exposed to current debt shock than are shorter-term bonds, they are better hedges, resulting in high yield spreads in high-debt states. The model highlights the importance of fiscal risk in understanding the Treasury bond market. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.