Debt Maturity: Does It Matter for Fiscal Space?

Jun Kim

No 2015/257, IMF Working Papers from International Monetary Fund

Abstract: This paper examines how debt maturity affects the debt limit, defined as the maximum amount of debt a government can afford without defaulting. We develop a model where investors are risk neutral, the primary balance is stochastic but exogenous, and default occurs solely due to the government’s inability to pay. We find that debt limit is higher for long-term debt. Underlying this finding is the intrinsic advantage of long-term debt to price in future upside potential in fiscal outcomes in its current price. Such advantage makes long-term debt effectively cheaper than short-term debt at the margin, and leads to a higher debt limit. Simulation results suggest that the effect of debt maturity on debt limit could be substantial—particularly, if fiscal outcomes are subject to large uncertainty.

Keywords: WP; long-term debt; short-term debt; sovereign default; debt maturity; fiscal space; debt limit; debt sustainability; bond price; debt stress warning; default probability; debt limit schedule; debt contract; current price; long-duration bond; Debt limits; Asset prices; Fiscal stance; Debt default; Bonds; Global (search for similar items in EconPapers)
Pages: 26
Date: 2015-12-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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