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Title: Fiscal Capacity: An Asset Pricing Perspective
This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature.  more » « less
Award ID(s):
2049260
PAR ID:
10489200
Author(s) / Creator(s):
; ; ;
Publisher / Repository:
www.annualreviews.org
Date Published:
Journal Name:
Annual Review of Financial Economics
Volume:
15
Issue:
1
ISSN:
1941-1367
Page Range / eLocation ID:
197 to 219
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
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