The Maturity and Payment Schedule of Sovereign Debt

Yan Bai, Seon Tae Kim and Gabriel Mihalache

No 20896, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the maturity and stream of payments of sovereign debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shortened maturity but back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. During recessions, the country prefers its payments to be more back-loaded—delaying relatively larger payments—to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost.

JEL-codes: E62 F34 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-mac and nep-opm
Note: IFM
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Maturity and Repayment Structure of Sovereign Debt (2014)
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