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Optimal maturity of government debt without state contingent bonds

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  • Buera, Francisco
  • Nicolini, Juan Pablo

Abstract

This paper shows that state contingent debt can be syntethically constructed using non-contingent debt of di¤erent maturities. A main policy implication of this principle is that the complete markets Ramsey allocation can be sustained with non-contingent debt only, by properly managing its maturity structure. The numerical experiments, however, suggest that this policy implication ought to be taken with care. We …nd that the debt positions that sustain the Ramsey allocation are very high (on the order of a few hundred times total GDP for a very simple four state economy) and increasing in the number of states. In addition, they are very sensitive to small variations in the parameters of the model

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 3 (April)
Pages: 531-554

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Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:531-554

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  2. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  3. Ravn, Morten O. & Sola, Martin, 1995. "Stylized facts and regime changes: Are prices procyclical?," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 497-526, December.
  4. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
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