The Optimal Maturity of Government Debt

Anmol Bhandari, David Evans, Mikhail Golosov and Thomas Sargent
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Anmol Bhandari: University of Minnesota
David Evans: University of Oregon

No 1011, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a novel class of perturbations to study the optimal composition of a government's debt portfolio. We derive a formula for the optimal portfolio and show that it can be expressed in terms of estimable “sufficient statistics”. We use U.S. data to calculate the key moments required by our theory and show that they imply that the optimal portfolio is approximately geometrically declining in bonds of different maturities and requires little rebalancing in response to aggregate shocks. Our optimal portfolio differs from portfolios prescribed by existing models often used in the business cycle literature and also from those adopted by the U.S. Treasury. The key normative differences are driven by counterfactual asset pricing implications of standard models.

Date: 2019
New Economics Papers: this item is included in nep-dge
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