Optimal time-consistent government debt maturity

Davide Debortoli, Ricardo Nunes and Pierre Yared

No 16-4, Working Papers from Federal Reserve Bank of Boston

Abstract: The current literature on a government's optimal debt maturity structure contends that by purchasing short-term assets and selling long-term debt, it is possible to fully insulate the economy against fiscal shocks. The required short and long positions are large relative to GDP and constant. The market value of debt adjusts automatically and the constant debt positions and fluctuating bond prices insulate against potential shocks. However, achieving the goal of averting future shocks depends on the government perfectly committing to the future fiscal policy, for without this sustained commitment, the large debt positions required to insure against future spending shocks are extremely expensive to service; moreover, the government faces a tradeoff between using the debt maturity structure to service its debt obligations and using it to protect against economic shocks. As the authors point out, in practice a government chooses tax, spending, and debt levels sequentially in each period, taking into account its outstanding debt portfolio and anticipating the behavior of future governments. The paper develops an alternative model of optimal debt maturity that solves the problem of a government's lack of commitment.

Keywords: public debt; optimal taxation; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H21 H63 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-05-17
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Optimal Time-Consistent Government Debt Maturity (2017)
Working Paper: Optimal Time-Consistent Government Debt Maturity (2016)
Working Paper: Optimal time-consistent government debt maturity (2016)
Working Paper: Optimal Time-Consistent Government Debt Maturity (2014)
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