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Sovereign Debt Maturity without Commitment

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  • Dirk Niepelt

    (Gerzensee/Bern/Stockholm)

Abstract

I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long-term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 231.

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Date of creation: 2009
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Handle: RePEc:red:sed009:231

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  1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  2. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
  3. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
  4. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default In "Bad Times"?," CAMA Working Papers 2007-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Sandleris, Guido, 2008. "Sovereign defaults: Information, investment and credit," Journal of International Economics, Elsevier, vol. 76(2), pages 267-275, December.
  6. Elisa Faraglia & Albert Marcet & Andrew Scott, 2008. "In Search of a Theory of Debt Management," Working Papers 348, Barcelona Graduate School of Economics.
  7. Alesina, A. & Prati, A. & Tabellini, G., 1989. "Public Confidence And Debt Management: A Model And A Case Study Of Italy," Papers 5, California Los Angeles - Applied Econometrics.
  8. Cristina Arellano & Ananth Ramanarayanan, 2008. "Default and the maturity structure in sovereign bonds," Staff Report 410, Federal Reserve Bank of Minneapolis.
  9. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
  10. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
  11. Fernando A. Broner & Guido Lorenzoni & Sergio L. Schmukler, 2007. "Why Do Emerging Economies Borrow Short Term?," NBER Working Papers 13076, National Bureau of Economic Research, Inc.
  12. Egil Matsen & Ragnar Torvik & Tommy Sveen, 2004. "Savers, Spenders and Fiscal Policy in a Small Open Economy," Working Paper Series 4704, Department of Economics, Norwegian University of Science and Technology.
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Cited by:
  1. Martín Gonzalez-Eiras & Dirk Niepelt, 2012. "Economic and Politico-Economic Equivalence of Fiscal Policies," CESifo Working Paper Series 3718, CESifo Group Munich.

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