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Debt Maturity: Is Long-Term Debt Optimal?

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  • Laura Alfaro
  • Fabio Kanczuk

Abstract

We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13119.

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Date of creation: May 2007
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Publication status: published as Laura Alfaro & Fabio Kanczuk, 2009. "Debt Maturity: Is Long-Term Debt Optimal?," Review of International Economics, Blackwell Publishing, vol. 17(5), pages 890-905, November.
Handle: RePEc:nbr:nberwo:13119

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Cited by:
  1. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 101(6), pages 2530-61, October.
  2. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, Elsevier, vol. 79(1), pages 117-125, September.
  3. Fernando Broner & Guido Lorenzoni & Sergio Schmuckler, 2006. "Why Do Emerging Economies Borrow Short Term?," 2006 Meeting Papers, Society for Economic Dynamics 841, Society for Economic Dynamics.
  4. Luis Opazo & Claudio Raddatz & Sergio Schmukler, 2009. "The Long And The Short Of Emerging Market Debt," Working Papers Central Bank of Chile, Central Bank of Chile 530, Central Bank of Chile.
  5. Laura Alfaro & Fabio Kanczuk, 2007. "Nominal versus Indexed Debt: A Quantitative Horse Race," NBER Working Papers 13131, National Bureau of Economic Research, Inc.
  6. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2014. "Institutional investors and long-term investment : evidence from Chile," Policy Research Working Paper Series, The World Bank 6922, The World Bank.
  7. Samia Omrane, 2012. "An Analysis of Exchange Rate Risk Exposure Related to the Public Debt Portfolio of Tunisia: Beyond VaR Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(1), pages 59-87, March.
  8. Javier J. Pérez & Rocío Prieto, 2014. "The structure of sub-natural public debt: Liquidity vs credit risk," Banco de Espa�a Working Papers, Banco de Espa�a 1403, Banco de Espa�a.

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