Maturity Structure and Liquidity Risk

Andolfatto, David

doi:10.20955/wp.2020.008

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Maturity Structure and Liquidity Risk

FRB St. Louis Working Paper No. 2020-8

21 Pages Posted: 29 Apr 2020 Last revised: 23 Jun 2022

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Date Written: April, 2020

Abstract

This paper studies the optimal maturity structure for government debt when markets for liquidity insurance are incomplete or non-competitive. There is no fiscal risk. Government debt in the model solves a dynamic inefficiency. Issuing debt in short and long maturities solves a liquidity insurance problem, but optimal yield curve policy is only possible if long-duration debt is rendered illiquid. Optimal policy is implementable through treasury operations only--adjustments in the primary deficit are not necessary.

Keywords: Maturity structure, yield curves, liquidity

JEL Classification: E4, E5

Suggested Citation: Suggested Citation

Andolfatto, David, Maturity Structure and Liquidity Risk (April, 2020). FRB St. Louis Working Paper No. 2020-8, Available at SSRN: https://ssrn.com/abstract=3587695 or http://dx.doi.org/10.20955/wp.2020.008