Preferred Habitat and the Optimal Maturity Structure of Government Debt

Abstract

We propose a clientele-based theory of the optimal maturity structure of government debt. We assume a three-period economy in which clienteles correspond to generations of agents consuming in different periods. An optimal maturity structure exists even in the absence of distortionary taxes, and consists in the government replicating the actions of private agents not yet present in the market. The optimal fraction of long-term debt increases in the weight of the long-horizon clientele, provided that agents are more risk-averse than log. We examine how changes in maturity structure affect equilibrium prices and show that in contrast to most representative-agent models, lengthening the maturity structure raises the slope of the yield curve.