What Drives Variation in the U.S. Debt/Output Ratio? The Dogs that Didn't Bark

If the U.S. is on a fiscally sustainable path, then higher U.S. government debt/output ratios should reliably predict higher future surpluses or lower real returns on Treasurys. In the post-war sample, we find no evidence for this. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. Instead, the future debt/output ratio accounts for most of the variation. Systematic surplus forecast errors can account for part of these findings. Since the start of the GFC, surplus projections have anticipated a large fiscal correction that failed to materialize. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.