Working Paper

Optimal time-consistent government debt maturity


Abstract: The current literature on a government's optimal debt maturity structure contends that by purchasing short-term assets and selling long-term debt, it is possible to fully insulate the economy against fiscal shocks. The required short and long positions are large relative to GDP and constant. The market value of debt adjusts automatically and the constant debt positions and fluctuating bond prices insulate against potential shocks. However, achieving the goal of averting future shocks depends on the government perfectly committing to the future fiscal policy, for without this sustained commitment, the large debt positions required to insure against future spending shocks are extremely expensive to service; moreover, the government faces a tradeoff between using the debt maturity structure to service its debt obligations and using it to protect against economic shocks. As the authors point out, in practice a government chooses tax, spending, and debt levels sequentially in each period, taking into account its outstanding debt portfolio and anticipating the behavior of future governments. The paper develops an alternative model of optimal debt maturity that solves the problem of a government's lack of commitment.

Keywords: public debt; optimal taxation; fiscal policy;

JEL Classification: E62; H21; H63;

Access Documents

File(s): File format is text/html http://www.bostonfed.org/economic/wp/wp2016/wp1604.htm
Description: Abstract

File(s): File format is application/pdf http://www.bostonfed.org/economic/wp/wp2016/wp1604.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2016-05-17

Number: 16-4

Pages: 45 pages