fiscal sustainability

Valuing Government Obligations When Markets Are Incomplete

Valuing future government spending commitments and tax receipts, whether they are sure or risky, is critical to assessing the sustainability of fiscal policy. If markets were complete it would be an easy matter to determine if the present value of projected spending exceeded the present value of projected receipts. But such markets don’t exist for numerous reasons including the inability of the living to trade with the unborn. Nor can one use prevailing security prices since they don’t span long-term states of nature let alone cover all relevant contingencies in the short and medium runs.

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