Optimal maturity of government debt without state contingent bonds
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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- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
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- 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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