NBER

Zhengyang Jiang

Kellogg School of Management
Northwestern University
2211 Campus Drive
Evanston, IL 60610

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Northwestern University

NBER Working Papers and Publications

September 2020Manufacturing Risk-free Government Debt
with Hanno Lustig, Stijn Van Nieuwerburgh, Mindy Z. Xiaolan: w27786
Governments face a trade-off between insuring bondholders and taxpayers. If the government decides to fully insure bondholders by manufacturing risk-free debt, then it cannot insure taxpayers against permanent macro-economic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government fully insures taxpayers against adverse macro shocks, then the debt becomes at least as risky as un-levered equity. Only when government debt earns convenience yields, may governments be able to insure both bondholders and taxpayers, and then only if the convenience yields are sufficiently counter-cyclical.
August 2020Dollar Safety and the Global Financial Cycle
with Arvind Krishnamurthy, Hanno Lustig: w27682
We build a model of the global financial cycle with one key ingredient: the demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, low U.S. interest rates and exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy.
December 2019The U.S. Public Debt Valuation Puzzle
with Hanno Lustig, Stijn Van Nieuwerburgh, Mindy Z. Xiaolan: w26583
The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasuries mus...
March 2018Foreign Safe Asset Demand and the Dollar Exchange Rate
with Arvind Krishnamurthy, Hanno Lustig: w24439
We develop a theory that links the U.S. dollar’s valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis: the yield gap between U.S. government and currency-hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models which impute a special role to the U.S. as the world’s provider of safe assets and the dollar, the world’s reserve currency.

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