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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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  • Yves Nosbusch, 2008. "Interest Costs and the Optimal Maturity Structure Of Government Debt," Economic Journal, Royal Economic Society, vol. 118(527), pages 477-498, March.
  • Handle: RePEc:ecj:econjl:v:118:y:2008:i:527:p:477-498
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    Cited by:

    1. Hafedh BOUAKEZ & Rigas OIKONOMOU & Romanos PRIFTIS, 2016. "Optimal Debt Management in a Liquidity Trap," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2016005, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    3. 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.
    4. Faraglia, Elisa & Marcet, Albert & Oikonomou, Rigas & Scott, Andrew, 2014. "Government Debt Management: The Long and the Short of It," CEPR Discussion Papers 10281, C.E.P.R. Discussion Papers.
    5. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1914-1961.
    6. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, pages 821-836.
    7. Ellison, Martin & Scott, Andrew, 2017. "Managing the UK National Debt 1694-2017," LSE Research Online Documents on Economics 86148, London School of Economics and Political Science, LSE Library.
    8. Elisa Faraglia & Albert Marcet & Rigas Oikonomou & Andrew Scott, 2014. "Government Debt Management: The Long and the Short of It (Plus Appendix)," Working Papers 799, Barcelona Graduate School of Economics.
    9. 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.
    10. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2014. "Modelling Long Bonds - The Case of Optimal Fiscal Policy," CEPR Discussion Papers 9965, C.E.P.R. Discussion Papers.
    11. 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.
    12. 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.
    13. Lustig, Hanno & Sleet, Christopher & Yeltekin, Sevin, 2008. "Fiscal hedging with nominal assets," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 710-727, May.
    14. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42.
    15. Equiza-Goni, Juan & Faraglia, Elisa & Oikonomou, Rigas, 2016. "Union Debt Management," CEPR Discussion Papers 11181, C.E.P.R. Discussion Papers.
    16. Rigas Oikonomou & Albert Marcet & Elisa Faraglia, 2016. "Long term Government Bonds," 2016 Meeting Papers 565, Society for Economic Dynamics.
    17. 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.
    18. Massimo BERNASCHI & Alessandro MISSALE & Davide VERGNI, 2009. "Should governments minimize debt service cost and risk? A closer look at the debt strategy. Simulation approach," Departmental Working Papers 2009-53, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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