Government Maturity Structure Twists

40 Pages Posted: 25 Apr 2016

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Gonzalo Morales

University of Alberta

Date Written: April 2016

Abstract

This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure has contractionary (expansionary) effects.

Suggested Citation

Corhay, Alexandre and Kung, Howard and Morales, Gonzalo, Government Maturity Structure Twists (April 2016). Available at SSRN: https://ssrn.com/abstract=2766020 or http://dx.doi.org/10.2139/ssrn.2766020

Alexandre Corhay

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
4169780512 (Phone)

Howard Kung (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gonzalo Morales

University of Alberta ( email )

Edmonton, AB T6G 2R3
Canada

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