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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.

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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:wly:econjl:v:118:y:2008:i:527:p:477-498
    DOI: 10.1111/j.1468-0297.2007.02130.x
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    2. David Andolfatto, 2020. "Maturity Structure and Liquidity Risk," Working Papers 2020-008, Federal Reserve Bank of St. Louis.
    3. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 821-836, October.
    4. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.
    5. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," The Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1914-1961.
    6. Beetsma, Roel & Giuliodori, Massimo & Hanson, Jesper & de Jong, Frank, 2021. "The maturity of sovereign debt issuance in the euro area," Journal of International Money and Finance, Elsevier, vol. 110(C).
    7. Bouakez, Hafedh & Oikonomou, Rigas & Priftis, Romanos, 2018. "Optimal debt management in a liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 5-21.
    8. Tal Sadeh & Yehuda Porath, 2020. "Autonomous agencies and relational contracts in government bond issues," Regulation & Governance, John Wiley & Sons, vol. 14(4), pages 741-763, October.
    9. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    10. Basil Dalamagas & Stefanos Tantos, 2017. "Optimal Sovereign Debt for an Overdebted Country," Australian Economic Papers, Wiley Blackwell, vol. 56(2), pages 95-118, June.
    11. Yehuda Porath & Tal Sadeh, 2022. "National Debt Management Autonomy and National Debt Maturity at Issue," Bank of Israel Working Papers 2022.14, Bank of Israel.
    12. 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.

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