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Debt Management Policy, Interest Rates, and Economic Activity

  • Benjamin M. Friedman
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    The maturity structure of the U.S. government's outstanding debt has undergone large changes over time, at least in part because of shifts in the Treasury's debt management policy. During most of the post World War I1 period, an emphasis on short-term issues rapidly reduced the debt's average maturity. In the early 1960's and again since 1975, however, the opposite policy just as rapidly lengthened (and is now lengthening) the average maturity, Such changes in debt management policy in general affect the structure of relative asset yields as well as nonfinancial economic activity. The evidence presented in this paper indicates that debt management actions of a magnitude comparable to the recent changes in U.S. debt management policy have sizeable effects both in the financial markets and more broadly. In particular, a shift from long-term to short-term government debt - that is, a shift opposite to the Treasury's recent policy - lowers yields on long-term assets, raises yields on short-term assets, and in the short run stimulates output and spending. Moreover, the stimulus to spending is disproportionately concentrated in fixed investment, so that debt management actions shortening the maturity of the government debt not only increase the economy's output but also shift the composition of output toward increased capital formation.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0830.

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    Date of creation: Dec 1981
    Date of revision:
    Publication status: published as Jonas Agell, Mats Persson and Benjamin M. Friedman, Does Debt Management Policy Matter? (Oxford, 1992).
    Handle: RePEc:nbr:nberwo:0830
    Note: ME
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    1. de Leeuw, Frank & Gramlich, Edward M, 1969. "The Channels of Monetary Policy: A Further Report on the Federal Reserve-M.I.T. Model," Journal of Finance, American Finance Association, vol. 24(2), pages 265-90, May.
    2. Franco Modigliani & Richard Sutch, 1967. "Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience," Journal of Political Economy, University of Chicago Press, vol. 75, pages 569.
    3. Thomas J. Sargent, 1978. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Staff Report 26, Federal Reserve Bank of Minneapolis.
    4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    5. Friedman, Benjamin M, 1979. "Substitution and Expectation Effects on Long-Term Borrowing Behavior and Long-Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 131-50, May.
    6. Benjamin M. Friedman, 1980. "The Effect of Shifting Wealth Ownership on the Term Structure of Interest Rates," NBER Working Papers 0239, National Bureau of Economic Research, Inc.
    7. Blanchard, Olivier J & Plantes, Mary Kay, 1977. "A Note on Gross Substitutability of Financial Assets," Econometrica, Econometric Society, vol. 45(3), pages 769-71, April.
    8. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
    9. Benjamin M. Friedman & V. Vance Roley, 1979. "A Note on the Derivation of Linear Homogeneous Asset Demand Functions," NBER Working Papers 0345, National Bureau of Economic Research, Inc.
    10. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-75, November.
    11. Feldstein, Martin S & Chamberlain, Gary, 1973. "Multimarket Expectations and the Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(4), pages 873-902, November.
    12. Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-16, May.
    13. Friedman, Benjamin M, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 661-89, August.
    14. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(04), pages 347-400, December.
    15. Benjamin M. Friedman, 1980. "The Effect of Shifting Wealth Ownership on the Term Structure of Interest Rates: The Case of Pensions," The Quarterly Journal of Economics, Oxford University Press, vol. 94(3), pages 567-590.
    16. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    17. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-26, December.
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