Optimal Maturity of Government Debt with Incomplete Markets

Francisco Buera and Juan Pablo Nicolini

No 1769, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In this paper we show how risk free bonds of different maturities can be used to replace state contingent debt in a general equilibrium dynamic optimal taxation problem. In particular, we show that if the state of the economy can only take a finite number N of values each period, then the government can support the complete markets Ramsey allocation issuing bonds of J> N different maturities. We also show that the optimal maturity structure does depend on teh relationship between the term strucutre of interest rates and goverenment expenditures. In the case that intreset rates are positively correlated with government expenditures in the Ramsey solution, then the government must hold short run assets and long term liabilites.

Date: 2000-08-01
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