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Optimal Maturity of Government Debt with Incomplete Markets

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  • Francisco Buera

    (University of Chicago)

  • Juan Pablo Nicolini

    (Universidad di Tella)

Abstract

In this paper we show how risk free bonds of different maturities can be used to replace state contingent debt in a general equilibrium dynamic optimal taxation problem. In particular, we show that if the state of the economy can only take a finite number N of values each period, then the government can support the complete markets Ramsey allocation issuing bonds of J> N different maturities. We also show that the optimal maturity structure does depend on teh relationship between the term strucutre of interest rates and goverenment expenditures. In the case that intreset rates are positively correlated with government expenditures in the Ramsey solution, then the government must hold short run assets and long term liabilites.

Suggested Citation

  • Francisco Buera & Juan Pablo Nicolini, 2000. "Optimal Maturity of Government Debt with Incomplete Markets," Econometric Society World Congress 2000 Contributed Papers 1769, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1769
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    References listed on IDEAS

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    1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, pages 55-93.
    2. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
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    Cited by:

    1. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, pages 821-836.
    2. Marcet, Albert & Scott, Andrew, 2009. "Debt and deficit fluctuations and the structure of bond markets," Journal of Economic Theory, Elsevier, vol. 144(2), pages 473-501, March.
    3. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42.

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