Optimal Debt Management in a Liquidity Trap

Hafedh Bouakez, Rigas Oikonomou and Romanos Priftis

No 2016005, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We study optimal debt management in the face of shocks that can precipitate the economy into a liquidity trap and call for an increase in public spending in order to mitigate the resulting recession. Our approach follows the sizable literature of macroeconomic models of debt management, which we extend to the case where the zero lower bound on the short-term interest rate binds. We wish to identify the conditions under which removing long debt from the secondary market can become an optimal policy outcome. We show that the optimal debt-management strategy is to issue short-term debt if the government faces a sizable exogenous increase in public spending and if its initial liability is not very large. In this case, our results run against the standard prescription of the debt-management literature. Finally, we show that when the government sets optimally the level of public spending, the optimality of long-term debt is restored.

Keywords: Debt Management; Debt Maturity; Fiscal Policy; Liquidity Trap; Monetary Policy; Tax Smoothing (search for similar items in EconPapers)
JEL-codes: E43 E62 H63 (search for similar items in EconPapers)
Pages: 11
Date: 2016-01-31
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal debt management in a liquidity trap (2018)
Working Paper: Optimal Debt Management in a Liquidity Trap (2017)
Working Paper: Optimal Debt Management in a Liquidity Trap (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2016005

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