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Optimal Debt Maturity Management


  • Hanno Lustig
  • Christopher Sleet
  • Sevin Yeltekin


Governments have traditionally financed their activities by selling nominal debt of various maturities. A long standing question concerns the optimal management of these liabilities. Many contributors have posited a role for short term nominal debt, either on cost minimization grounds or on tax smoothing grounds in the context of reduced form models. We develop a fully specified general equilibrium model in which two offsetting forces influence the optimal maturity structure. On the one hand, a fiscal hedging motive pushes the government towards the use of long term nominal debt; on the other, a cost of funds motive pushes the government towards the use of short term debt. The first motive stems from the fact that long term debt allows the government to postpone the distortions associated with an adjustment to the real return on its portfolio. The second stems from liquidity shocks to agents that raise the risk premium and, hence, the cost to the government from selling long term debt. We show that as the total stock of debt increases the fiscal hedging motive predominates and the average maturity of the government's debt increases. This is consistent with the management of the US Federal government debt in the post war period.

Suggested Citation

  • Hanno Lustig & Christopher Sleet & Sevin Yeltekin, 2006. "Optimal Debt Maturity Management," 2006 Meeting Papers 367, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:367

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    More about this item


    Optimal Maturity; Liquidity Demand; Fiscal Hedging;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General


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