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Debt-Maturity Management with Liquidity Costs

Author

Listed:
  • Saki Bigio
  • Galo Nuño
  • Juan Passadore

Abstract

We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary-market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. This characterization allows us to quantify how the government’s relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.

Suggested Citation

  • Saki Bigio & Galo Nuño & Juan Passadore, 2023. "Debt-Maturity Management with Liquidity Costs," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 119-190.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/723392
    DOI: 10.1086/723392
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    Cited by:

    1. Moretti,Matías & Pandolfi,Lorenzo & Schmukler,Sergio L. & Villegas Bauer,Germán & Williams,Tomás, 2024. "Inelastic Demand Meets Optimal Supply of Risky Sovereign Bonds," Policy Research Working Paper Series 10735, The World Bank.
    2. Max Ole Liemen & Olaf Posch, 2022. "FTPL and the Maturity Structure of Government Debt in the New Keynesian Model," CESifo Working Paper Series 9840, CESifo.

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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