Optimal time-consistent government debt maturity

Davide Debortoli, Ricardo Nunes and Pierre Yared

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted debt positions are very expensive to finance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.

Keywords: Public debt; optimal taxation; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H21 H63 (search for similar items in EconPapers)
Date: 2016-01, Revised 2016-05
New Economics Papers: this item is included in nep-dge and nep-mac
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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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1504

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