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Several important questions — such as the possibility of debt-rollover without primary surpluses — turn on whether the present value of the aggregate endowment is finite, i.e., whether the economic growth rate under the “risk-neutral” measure, lies below the risk-free rate. It is tempting to argue that the endowment must be finitely valued, since there exist finitely-valued, non-depreciating assets whose cash flows are cointegrated with aggregate output. This paper shows why this argument is incorrect. A remarkable historical episode in which French government bonds were indexed to aggregate growth allows direct measurement of the risk-adjusted growth rate, which is found to exceed the risk-free rate.
That is from a new NBER working paper by Stavros Panageas.
The post Big if true appeared first on Marginal REVOLUTION.
