NBER Paper Finds Risk-Adjusted Growth Rate Exceeds Risk-Free Rate
A new NBER working paper by Stavros Panageas addresses whether the present value of the aggregate endowment is finite, a question that affects issues such as the possibility of debt rollover without primary surpluses. The paper examines whether the economic growth rate under the risk-neutral measure lies below the risk-free rate. It argues that a common argument—that the endowment must be finitely valued because finitely valued, non-depreciating assets have cash flows cointegrated with aggregate output—is incorrect. The study uses a historical episode in which French government bonds were indexed to aggregate growth to directly measure the risk-adjusted growth rate. The finding shows that this risk-adjusted growth rate exceeds the risk-free rate.
What’s reported
The working paper addresses whether the present value of the aggregate endowment is finite.
The question turns on whether the risk-neutral economic growth rate lies below the risk-free rate.
The paper argues that the argument for finite valuation based on finitely valued, non-depreciating assets cointegrated with output is incorrect.
It uses a historical episode of French government bonds indexed to aggregate growth.
The risk-adjusted growth rate was found to exceed the risk-free rate.
Open questions
The article does not specify the details of the historical episode involving French government bonds or the broader implications for debt rollover and primary surpluses.
Misconceptions
The source article addresses the misconception that the aggregate endowment must be finitely valued because finitely valued, non-depreciating assets have cash flows cointegrated with aggregate output. The paper shows this argument is incorrect.
Key figures
Stavros Panageas (author of the NBER working paper)
Sources: marginalrevolution.com
