How Does The U.S. Government Finance Fiscal Shocks?

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Executive Summary

Author developed a method for identifying and quantifying the fiscal channels that help finance government spending shocks and apply it to postwar U.S. data. The paper defines fiscal shocks as surprises in defense spending and shows that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. The results show that in the postwar period, over 9% of the U.S. government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 73% by an increase in primary surpluses. Author provides evidence that longer maturity debt is more effective at absorbing fiscal risk and discusses the implications of this result for active management of public debt.

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