Gap-filling government debt maturity choice
No 110, ESRB Working Paper Series from European Systemic Risk Board
Do governments strategically choose debt maturity to fill supply gaps across maturities? Building on a new panel data set of more than 9,000 individual Eurozone government debt issues between 1999 and 2015, I find that governments increase long-term debt issues following periods of low aggregate Eurozone long-term debt issuance, and vice versa. This gap-filling behaviour is more pronounced for (1) less financially constrained and (2) higher rated governments. Using the ECB’s three-year LTRO in 2011-2012 as an event study, I find that core governments filled the supply gap of longer maturity debt, which resulted from peripheral governments accommodating banks’ short-term debt demand for “carry trades”. This gap-filling implies that governments act as macro-liquidity providers across maturities, thereby adding significant risk absorption capacity to government bond markets. JEL Classification: E58, E62, G11, H63
Keywords: financial stability; government bond market; liquidity provision; market segmentation (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2020110
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