Maturity Structure Of Government Debt Research Articles

FTPL and the Maturity Structure of Government Debt in the New Keynesian Model

FTPL and the Maturity Structure of Government Debt in the New Keynesian Model

FTPL and the Maturity Structure of Government Debt in the New-Keynesian Model

FTPL and the Maturity Structure of Government Debt in the New-Keynesian Model

Should We Worry about Government Debt? Thoughts on Australia's COVID‐19 Response

AbstractNo. While the COVID‐19 crisis has required a dramatic increase in debt‐financed government spending, in the current conditions the benefits from this debt are unusually high and the costs unusually low. While conditions can change, the Australian Government can right now hedge against these risks by lengthening the maturity structure of government debt, even at the cost of a modest increase in its current servicing costs.

Bond Supply and Excess Bond Returns

We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.

Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt

We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy. An optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing. If agents are more risk-averse than log, then an increase in the long-horizon clientele raises the price and optimal supply of long-term bonds. But while a welfare-maximizing government caters to clienteles, it does not accommodate fully their demand, and limits issuance of long-term bonds to a level where these earn negative expected excess returns.

On Graduation from Default, Inflation, and Banking Crises: Elusive or Illusion?

This paper uses a data set of over two hundred years of sovereign debt, banking and inflation crises to explore the question of how long it takes a country to "graduate" from the typical pattern of serial crisis that most emerging markets experience. We find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. We also examine the more recent phenomenon of IMF programs, which sometimes result in "near misses" but sometimes end in default even after a program is instituted. The paper raises the important theoretical question of why countries experience serial default, and how they might graduate.

A Gap‐Filling Theory of Corporate Debt Maturity Choice

ABSTRACTWe argue that time variation in the maturity of corporate debt arises because firms behave as macro liquidity providers, absorbing the supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with more short‐term debt, firms fill the resulting gap by issuing more long‐term debt, and vice versa. This type of liquidity provision is undertaken more aggressively: (1) when the ratio of government debt to total debt is higher and (2) by firms with stronger balance sheets. Our theory sheds new light on market timing phenomena in corporate finance more generally.

Preferred Habitat and the Optimal Maturity Structure of Government Debt

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.

Interest Costs and the Optimal Maturity Structure Of Government Debt

The government faces a trade‐off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio. The article solves for optimal policies in an incomplete markets model where the government uses two debt instruments, long‐term and short‐term non‐contingent, nominal bonds. In this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long‐term debt. The resulting welfare gains are close to what the government could achieve with complete markets. Significant welfare gains are possible even in the presence of leverage constraints.

Bond Supply and Excess Bond Returns

We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.

Managing the maturity structure of government debt

It is known that a government can implement the optimal complete-market Ramsey allocations by issuing non-contingent bonds of different maturities. The implied optimal maturity structure is time- and state-invariant—i.e. it is not actively managed. I construct a model where the Ramsey allocations can be implemented with active management of the maturity structure. In a numerical example that reflects the time-series properties of the British government's expenditure during the 18th century, its historic pattern of maturity management is replicated.

On the irrelevance of the maturity structure of government debt without commitment

This paper presents a government debt game with the property that if the timing of debt auctions within a period is sufficiently unfettered, the set of equilibrium outcome paths of real economic variables given the government has access to a rich debt structure is identical to the set of equilibrium outcome paths given the government can issue only one-period debt.

Tax Smoothing Implications of the Federal Debt Paydown

AFTER NEARLY THIRTY straight years of deficit spending, the fiscal position of the U.S. government has experienced a dramatic turnaround. In fiscal years 1998 and 1999, for the first time since the 1950s, the federal government ran back-to-back budget surpluses. With the government no longer a net borrower, the Treasury has started paying down the federal debt: debt held by the public fell from $3.5 trillion in March 1998 to $3.0 trillion in July 2000. And both the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) are forecasting that these surpluses will continue over the next decade,(1) in amounts large enough that the public debt will be fully redeemed in 2012. Although these official forecasts may prove too optimistic, it is reasonable to expect that the quantity of publicly held debt will shrink considerably over the next decade.(2) The pending debt paydown has several implications for macroeconomic policy. This paper focuses on only one of these. All types of debt allow the government to smooth taxes through time, but when debt is denominated in nominal dollars, it also allows the government to hedge against fiscal shocks. As the federal debt shrinks, the government's ability to shift the risk of adverse fiscal outcomes onto debt holders will be reduced considerably. To see this, consider the choices faced by a fiscal authority when an unexpected increase in spending occurs. To satisfy the government's net-present-value budget constraint, the fiscal authority can either raise taxes, now or in the future; cut spending in other areas, now or in the future; or impose a capital loss on existing bondholders, through inflation, higher interest rates, or explicit indexation to fiscal shocks. As the public debt falls, the government's ability to use this third option is diminished; hence either taxes or spending, or both, will become more variable. This paper illustrates this idea theoretically and document it empirically using data from the late 1800s and from the post-World War II period. The insight that debt can be used to hedge fiscal shocks is not new; indeed, it has been developed in a series of papers over the last quarter century. For example, Robert Barro concluded that tax rates should change only when unanticipated shocks change the discounted present value of the stream of primary surpluses.(3) Thus, in an economy containing government debt and subject to stochastic shocks, the optimal path of tax rates follows a random walk regardless of the persistence properties of those shocks. Barro's partial-equilibrium model assumes a constant, non-state-contingent rate of return on debt and an objective function for the government that depends directly on tax rates rather than on consumption and output. Robert Lucas and Nancy Stokey formulated a general-equilibrium model in which the government sets fiscal and monetary policy to maximize households' objective function.(4) Debt plays two roles in their model. First, as in the Barro model, debt allows the government to smooth distorting tax rates over time.(5) But in an important departure from the Barro model, optimal policy in Lucas and Stokey's framework involves the government issuing and retiring bonds with a state-contingent payoff: the amount paid these bondholders in a given period would depend on what unexpected changes to government expenditure had occurred this period. Through these state-contingent payoffs, the government effectively purchases insurance from the public against these fiscal shocks. Second, debt acts as a commitment device. The government cannot precommit itself to follow a given tax rate policy in the future; by modifying the current maturity structure of government debt, however, today's government can manipulate the incentives of future governments to alter tax rates. Under a rich enough and properly chosen debt structure, the government today can set the debt structure such that future governments will select the same future tax rate sequence that the present government would have chosen. …

Comments and Discussion

The Tax Smoothing Implications of the Federal Debt Paydown George J. Hall and Stefan Krieger After nearly thirty straight years of deficit spending, the fiscal position of the U.S. government has experienced a dramatic turnaround. In fiscal years 1998 and 1999, for the first time since the 1950s, the federal government ran back-to-back budget surpluses. With the government no longer a net borrower, the Treasury has started paying down the federal debt: debt held by the public fell from $3.5 trillion in March 1998 to $3.0 trillion in July 2000. And both the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) are forecasting that these surpluses will continue over the next decade,1 in amounts large enough that the public debt will be fully redeemed in 2012. Although these official forecasts may prove too optimistic, it is reasonable to expect that the quantity of publicly held debt will shrink considerably over the next decade.2 The pending debt paydown has several implications for macroeconomic policy. This paper focuses on only one of these. All types of debt allow [End Page 253] the government to smooth taxes through time, but when debt is denominated in nominal dollars, it also allows the government to hedge against fiscal shocks. As the federal debt shrinks, the government’s ability to shift the risk of adverse fiscal outcomes onto debt holders will be reduced considerably. To see this, consider the choices faced by a fiscal authority when an unexpected increase in spending occurs. To satisfy the government’s net-present-value budget constraint, the fiscal authority can either raise taxes, now or in the future; cut spending in other areas, now or in the future; or impose a capital loss on existing bondholders, through inflation, higher interest rates, or explicit indexation to fiscal shocks. As the public debt falls, the government’s ability to use this third option is diminished; hence either taxes or spending, or both, will become more variable. This paper illustrates this idea theoretically and document it empirically using data from the late 1800s and from the post–World War II period. The insight that debt can be used to hedge fiscal shocks is not new; indeed, it has been developed in a series of papers over the last quarter century. For example, Robert Barro concluded that tax rates should change only when unanticipated shocks change the discounted present value of the stream of primary surpluses.3 Thus, in an economy containing government debt and subject to stochastic shocks, the optimal path of tax rates follows a random walk regardless of the persistence properties of those shocks. Barro’s partial-equilibrium model assumes a constant, non-state-contingent rate of return on debt and an objective function for the government that depends directly on tax rates rather than on consumption and output. Robert Lucas and Nancy Stokey formulated a general-equilibrium model in which the government sets fiscal and monetary policy to maximize households’ objective function.4 Debt plays two roles in their model. First, as in the Barro model, debt allows the government to smooth distorting tax rates over time.5 But in an important departure from the Barro model, optimal policy in Lucas and Stokey’s framework involves the government issuing and retiring bonds with a state-contingent payoff: the amount paid these bondholders in a given period would depend on what unexpected changes to government expenditure had occurred this period. [End Page 254] Through these state-contingent payoffs, the government effectively purchases “insurance” from the public against these fiscal shocks. Second, debt acts as a commitment device. The government cannot precommit itself to follow a given tax rate policy in the future; by modifying the current maturity structure of government debt, however, today’s government can manipulate the incentives of future governments to alter tax rates. Under a rich enough and properly chosen debt structure, the government today can set the debt structure such that future governments will select the same future tax rate sequence that the present government would have chosen. V. V. Chari, Lawrence Christiano, and Patrick Kehoe extend Lucas and Stokey’s work by analyzing optimal...

Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation

The role of debt maturity in managing the government's incentives to use opportunistic inflation to reduce the ex post real value of its nominal liabilities is explored. The maturity structure of government debt is shown to be a powerful instrument for affecting the time profile of the inflation tax base and, hence, for mitigating the distortions introduced by time inconsistency on taxation policies. The nature of the optimal policy is shown to be heavily dependent on the type of precommitment enjoyed by policymakers.

Management of the Nominal Public Debt Theory and Applications

Optimal management of the public debt is explored in a context where economic policy is continuously revised because, when the public debt is non—indexed, policy—makers are tempted to use inflation in order to reduce the real value of the public debt. The model’s implications are explored following two approaches. First, the effects of various exogenous disturbances are examined by means of numerical simulations. Secondly, the analysis explores—for Italy, Ireland, and the United States—if the model’s implications concerning the maturity structure of government debt are consistent with actual experience.

Management of the Nominal Public Debt Theory and Applications

Optimal management of the public debt is explored in a context where economic policy is continuously revised because, when the public debt is non—indexed, policy—makers are tempted to use inflation in order to reduce the real value of the public debt. The model’s implications are explored following two approaches. First, the effects of various exogenous disturbances are examined by means of numerical simulations. Secondly, the analysis explores—for Italy, Ireland, and the United States—if the model’s implications concerning the maturity structure of government debt are consistent with actual experience.

Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation

This paper focuses on the role of debt maturity in managing the government`s incentives to use opportunistic inflation to reduce the ex post real value of its nominal liabilities. The maturity structure of government debt is shown to be a powerful instrument to affect the time profile of the inflation tax base and, hence, to mitigate the distortions introduced by time inconsistency on taxation policies. The nature of the optimal policy is shown to be heavily dependent on the type of precommitment enjoyed by policymakers.

A simple rule for managing the maturity structure of government debt

A simple rule for managing the maturity structure of government debt