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Optimal Debt Maturity under EMU

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  • Raffaela Giordano

    () (Banca d'Italia, Research Department)

Abstract

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.

Suggested Citation

  • Raffaela Giordano, 2001. "Optimal Debt Maturity under EMU," Temi di discussione (Economic working papers) 401, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_401_01
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2001/2001-0401/tema_401_01.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    3. Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
    4. 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.
    5. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
    6. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858.
    7. Missale, Alessandro, 1997. "Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-265, September.
    8. 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.
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    Citations

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    Cited by:

    1. Nopphadon Buranathanung & Chaipat Poonpatpibul, 2002. "External Debt Dynamics and Current Account Sustainability," Working Papers 2002-03, Monetary Policy Group, Bank of Thailand.
    2. Luca Dedola & Eugenio Gaiotti & Luca Silipo, 2001. "Money demand in the euro area: do national differences matter?," Temi di discussione (Economic working papers) 405, Bank of Italy, Economic Research and International Relations Area.
    3. Noppadol Buranathanung & Chaipat Poonpatpibul, 2003. "External Debt Dynamics and Current Account Sustainability," Working Papers 2003-10, Monetary Policy Group, Bank of Thailand.

    More about this item

    Keywords

    debt management; maturity structure; optimal taxation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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