Debt Maturity: Is Long-Term Debt Optimal?

Laura Alfaro and Fabio Kanczuk

No 13119, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.

JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-mac and nep-pbe
Note: IFM PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Laura Alfaro & Fabio Kanczuk, 2009. "Debt Maturity: Is Long-Term Debt Optimal?," Review of International Economics, Blackwell Publishing, vol. 17(5), pages 890-905, November.

Downloads: (external link)
http://www.nber.org/papers/w13119.pdf (application/pdf)

Related works:
Journal Article: Debt Maturity: Is Long‐Term Debt Optimal? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13119

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13119

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().