Milstein All Research

The government budget constraint ties the market value of government debt to the expected risk adjusted present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the U.S. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasurys may be mispriced.

We characterize investors’ moral preferences in a parsimonious experimental setting, where we auction stocks with various ethical features. We find strong evidence that investors seek to align their investments with their social values (“value alignment”), and find no evidence of behavior driven by the social impact of investment decisions (“impact-seeking preferences”). First, the willingness to pay for a stock is a linear function of corporate externalities, and is symmetric for positive or negative externalities.

US wealth inequality and long-term real interest rates exhibit a strong negative correlation over the post-war period. We quantify how much of the observed increase in wealth inequality from 1983 to 2023 can be accounted for by the decline in rates. To do so, we combine asset holdings data with asset exposures to interest rates to measure the exposure of households' portfolios to interest rates. The portfolios of the wealthy have higher interest rate exposure due to a tilt toward equity-like assets with long duration. As a result,  wealth inequality increases when rates fall.

A higher U.S. government debt/output ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. The market valuation of Treasurys is surprisingly insensitive to the macro fundamentals. Instead, the future debt/output ratio accounts for most of the variation because the debt/output ratio is highly persistent. Systematic surplus forecast errors may help to account for these findings.

We analyze the impact of credit risk and higher interest rates on U.S. bank solvency, expanding on the work of Jiang et al. (2023). Our variation of their bank-run model demonstrates how credit losses and asset declines from higher interest rates can trigger self-fulfilling solvency runs, even when banks hold fully liquid assets. Banks with high credit losses, greater exposure to interest rate increases, low capital, and high uninsured leverage are particularly vulnerable.