Debt-Maturity Management with Liquidity Costs

Saki Bigio, Galo Nuño Barrau and Juan Passadore

Journal of Political Economy Macroeconomics, 2023, vol. 1, issue 1, 119 - 190

Abstract: We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary-market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. This characterization allows us to quantify how the government’s relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.

Date: 2023
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Working Paper: Debt-Maturity Management with Liquidity Costs (2019)
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