Inflation and the Maturity Structure of Nominal Debt
26 Pages Posted: 19 Dec 2010
Date Written: February 6, 2010
Episodes of high inflation are generally accompanied by a shortening of the maturity of nominal debt contracts. This paper develops a multiperiod general equilibrium model with incomplete markets to study the relationship between inflation and the maturity structure of nominal bonds. The model shows that under the presence of a small risk of price stabilization, high inflation can lead to a significant shortening of the maturities of nominal bonds traded among agents, yielding a negative relationship between inflation and maturity. The paper shows evidence of this negative correlation from Turkish data on Treasury auctions.
Keywords: Inflation, Debt Maturity, General Equilibrium, Stabilization Risk
JEL Classification: D50, D52, E44, E50, F34, G10
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