Debt maturity without commitment

Dirk Niepelt

Journal of Monetary Economics, 2014, vol. 68, issue S, S37-S54

Abstract: How does sovereign risk shape the maturity structure of public debt? We consider a government that balances benefits of default, due to tax savings, and costs, due to output losses. Debt issuance affects subsequent default and rollover decisions and thus, current debt prices. This induces welfare costs beyond the consumption smoothing benefits from the marginal unit of debt. The equilibrium maturity structure minimises these welfare costs. It is interior with positive gross positions and shortens during times of crisis and low output, consistent with empirical evidence.

Keywords: Debt; Maturity structure; No commitment; Default (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (25)

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Working Paper: Debt Maturity without Commitment (2008)
Working Paper: Debt Maturity without Commitment (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:68:y:2014:i:s:p:s37-s54

DOI: 10.1016/j.jmoneco.2014.08.006

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