On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions

Stéphane Auray and Aurélien Eyquem

Working Papers from HAL

Abstract: We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio. Abstract We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.

Keywords: Sovereign Default Risk; Financial Crisis; Fiscal Policy (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-dge
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01467214v1
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: ON THE ROLE OF DEBT MATURITY IN A MODEL WITH SOVEREIGN RISK AND FINANCIAL FRICTIONS (2019)
Working Paper: On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions (2019)
Working Paper: On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions (2017)
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