Optimal Time-Consistent Government Debt Maturity

This paper develops a model of optimal government debt maturity in which the gov- ernment cannot issue state-contingent bonds and cannot commit to scal policy. If the government can perfectly commit, it fully insulates the economy against government spend- ing shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted debt positions are very ex- pensive to nance ex-ante since they exacerbate the problem of lack of commitment ex-post. In contrast, a at maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of scal policy distortions. We show that the optimal time-consistent maturity structure is nearly at because reducing average borrow- ing costs is quantitatively more important for welfare than reducing scal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by con ning its debt instruments to consols.