On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions
GATE WP 1707 – February 2017
15 Pages Posted: 14 Feb 2017
Date Written: February 14, 2017
We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.
Keywords: Sovereign Default Risk, Financial Crisis, Fiscal Policy
JEL Classification: E44, E62, H63
Suggested Citation: Suggested Citation