The Maturity and Payment Schedule of Sovereign Debt

28 Pages Posted: 9 Feb 2015 Last revised: 7 Aug 2021

See all articles by Yan Bai

Yan Bai

University of Rochester - Department of Economics

Seon Tae Kim

Instituto Tecnológico Autónomo de México (ITAM)

Gabriel Mihalache

Stony Brook University (SUNY)

Date Written: January 2015

Abstract

This paper studies the maturity and stream of payments of sovereign debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shortened maturity but back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. During recessions, the country prefers its payments to be more back-loaded—delaying relatively larger payments—to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost.

Suggested Citation

Bai, Yan and Kim, Seon Tae and Mihalache, Gabriel Paul, The Maturity and Payment Schedule of Sovereign Debt (January 2015). NBER Working Paper No. w20896, Available at SSRN: https://ssrn.com/abstract=2562194

Yan Bai (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Seon Tae Kim

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

Gabriel Paul Mihalache

Stony Brook University (SUNY) ( email )

Stony Brook, NY 11794
United States

HOME PAGE: http://www.gmihalache.com/

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