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Government Size and Risk Premium
Given the rise in the government debt level in recent times, this paper aims to examine the effect of an increase in government size on risk premium and its transmission in the economy. We jointly identify the term spread shock (originating at the short end and the long end) and the government size shock, using max share identification. Term spread shock originating at the long end is driven by higher risk premium, unlike the shock originating at the short end, and increases inflation and reduces growth. […]