Download this Paper Open PDF in Browser

A Comparative-Advantage Approach to Government Debt Maturity

53 Pages Posted: 22 Sep 2010 Last revised: 4 Jan 2011

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Samuel Gregory Hanson

Harvard Business School

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 23, 2010

Abstract

We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a simple setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk, and hence should aim to partially crowd out the private sector’s use of short-term debt.

Keywords: Government Debt Maturity, Corporate Debt Maturity, Fire sales, Money creation

JEL Classification: E44, E50, G32

Suggested Citation

Greenwood, Robin M. and Hanson, Samuel Gregory and Stein, Jeremy C., A Comparative-Advantage Approach to Government Debt Maturity (December 23, 2010). Harvard Business School Finance Working Paper No. 1680604. Available at SSRN: https://ssrn.com/abstract=1680604 or http://dx.doi.org/10.2139/ssrn.1680604

Robin Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Samuel Hanson

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Jeremy Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
325
Rank
78,754
Abstract Views
1,992