53 Pages Posted: 22 Sep 2010 Last revised: 4 Jan 2011
Date Written: December 23, 2010
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: 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