Optimal Debt Maturity under EMU
A standard result of optimal debt management models is that in a world of complete markets, where policymakers can make credible announcements, the maturity structure of government debt is totally irrelevant. This paper investigates the role of debt maturity in a very simple context in which policy precommitment is allowed but state-contingent debt cannot be issued and a constraint on the level of deficit is imposed. In line with the optimal taxation approach, in such a context debt maturity has a role to play. In fact, an appropriate choice of the maturity structure may remove the inefficiency introduced by the constraint on excessive deficits, making complete tax smoothing achievable when otherwise it would not be. Optimal maturity is shown to depend on the stochastic structure of the economy. In particular, it lengthens with the volatility of the interest rate and the size of debt; it shortens with the volatility of government spending and in the presence of a negative correlation between changes in interest rates and government financing needs. This suggests that, among the countries joining the European Union, Italy is the one that most needs to lengthen the maturity of its public debt. By looking at the evidence in some EU countries, the paper further investigates whether the introduction of constraints on deficit and debt levels has determined a change in debt management policies. This indirectly provides a test of the optimal taxation argument for public debt design.
|Date of creation:||Mar 2001|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Missale, Alessandro & Blanchard, Olivier Jean, 1994.
"The Debt Burden and Debt Maturity,"
American Economic Review,
American Economic Association, vol. 84(1), pages 309-319, March.
- Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
- Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
- Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, April.
- Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-265, September.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September. Full references (including those not matched with items on IDEAS)