Government Maturity Structure Twists

Abstract

This paper examines the impact of government debt maturity restructuring on ination and the real economy using a New Keynesian model that features a time-varying maturity structure of nominal debt and allows for changes in the monetary/scal policy mix. The irrelevance of open market operations changing the duration of government liabilities (holding the total market value of debt constant) is violated when the slope of the yield curve is nonzero in a scally-led policy regime. When the yield curve is downward-sloping, shortening the maturity structure increases the government discount rate, which generates scal ination and an expansion in output. The opposite results obtain when the yield curve is upwardsloping. Conditional maturity restructuring policies depending on the slope of the yield curve can smooth macroeconomic uctuations and oer substantial welfare benets. In short, this paper highlights the importance of bond risk premia, in conjunction with the government debt valuation equation, as a transmission channel for open market operations.