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Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model

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  • Calvo, Guillermo A
  • Guidotti, Pablo E

Abstract

The role of debt maturity is analyzed in a framework that blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities. Three conclusions emerge: (1) nominal debt leads policymakers to resort to inflation even though, in equilibrium, inflation collects no revenue; (2) when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level, the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment; and (3) management of debt maturity is an essential component of the equilibrium policy. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 33 (1992)
Issue (Month): 4 (November)
Pages: 895-919

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Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:895-919

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Cited by:
  1. Rigobon, Roberto, 2002. "Disinflation and fiscal reform: a neoclassical perspective," Journal of International Economics, Elsevier, vol. 58(2), pages 265-297, December.
  2. Joshua Aizenman & Ricardo Hausmann, 1994. "Why is Inflation Skewed? A Debt and Volatility Story," NBER Working Papers 4837, National Bureau of Economic Research, Inc.
  3. Xie, Danyang, 1997. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Journal of Economic Theory, Elsevier, vol. 76(2), pages 412-430, October.
  4. Beetsma,Roel M.W.J. & Bovenberg,A. Lans, 1995. "The role of public debt in the game of double chicken," Research Memorandum 025, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Ghada Abbas, 2006. "Gestion de la dette publique et lissage des taux d’imposition," CAE Working Papers 46, Aix-Marseille Université, CERGAM.
  6. Coe, P. & Pesaran, M.H. & Vahey, S.P., 2000. "The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach," Cambridge Working Papers in Economics 0005, Faculty of Economics, University of Cambridge.
  7. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-fulfilling debt crises," Staff Report 211, Federal Reserve Bank of Minneapolis.
  8. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
  9. Hakan Berument & Eray M. Yucel, 2005. "Return and maturity relationships for treasury auctions: evidence from Turkey," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 385-419, September.
  10. Kiley, Michael T., 1998. "Predicting Tax Rate Changes: Insights from the Permanent Income Hypothesis," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 153-167, January.
  11. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, vol. 121(552), pages 319-350, 05.
  13. Garima Vasishtha, 2010. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 1058-1074, November.

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