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Interest Costs and the Optimal Maturity Structure Of Government Debt

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  • Yves Nosbusch

Abstract

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. Copyright � 2008 The Author(s).

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2007.02130.x
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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 527 (03)
Pages: 477-498

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Handle: RePEc:ecj:econjl:v:118:y:2008:i:527:p:477-498

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Cited by:
  1. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," NBER Working Papers 18922, National Bureau of Economic Research, Inc.
  2. Hans J. Blommestein & Anja Hubig, 2012. "A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management," OECD Working Papers on Sovereign Borrowing and Public Debt Management 4, OECD Publishing.
  3. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42, January.
  4. Hanno Lustig & Christopher Sleet & Sevin Yeltekin, . "Fiscal Hedging with Nominal Assets," GSIA Working Papers 2006-E35, Carnegie Mellon University, Tepper School of Business.
  5. Johannes Holler, 2013. "Funding Strategies of Sovereign Debt Management: A Risk Focus," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 51–74.
  6. Elisa Faraglia & Albert Marcet & Andrew Scott, 2011. "In Search of a Theory of Debt Management," CEP Discussion Papers dp1083, Centre for Economic Performance, LSE.
  7. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176 Bank for International Settlements.
  8. Elisa Faraglia & Albert Marcet & Andrew Scott, 2012. "Debt management and optimal fiscal policy with long bonds," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 177-212 Bank for International Settlements.
  9. Hans J Blommestein & Anja Hubig, 2012. "Is the standard micro portfolio approach to sovereign debt management still appropriate?," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 141-155 Bank for International Settlements.

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