Debt Management Policy, Interest Rates, and Economic Activity

42 Pages Posted: 27 Apr 2000 Last revised: 22 Jan 2002

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

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

Date Written: December 1981


The maturity structure of the U.S. government's outstanding debt has undergone large changes over time, at least in part because of shifts in the Treasury's debt management policy. During most of the post World War I1 period, an emphasis on short-term issues rapidly reduced the debt's average maturity. In the early 1960's and again since 1975, however, the opposite policy just as rapidly lengthened (and is now lengthening) the average maturity, Such changes in debt management policy in general affect the structure of relative asset yields as well as nonfinancial economic activity. The evidence presented in this paper indicates that debt management actions of a magnitude comparable to the recent changes in U.S. debt management policy have sizeable effects both in the financial markets and more broadly. In particular, a shift from long-term to short-term government debt - that is, a shift opposite to the Treasury's recent policy - lowers yields on long-term assets, raises yields on short-term assets, and in the short run stimulates output and spending. Moreover, the stimulus to spending is disproportionately concentrated in fixed investment, so that debt management actions shortening the maturity of the government debt not only increase the economy's output but also shift the composition of output toward increased capital formation.

Suggested Citation

Friedman, Benjamin M., Debt Management Policy, Interest Rates, and Economic Activity (December 1981). NBER Working Paper No. w0830. Available at SSRN:

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

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