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

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: February 14, 2017

Abstract

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

Auray, Stéphane and Eyquem, Aurélien, On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions (February 14, 2017). GATE WP 1707 – February 2017. Available at SSRN: https://ssrn.com/abstract=2916656 or http://dx.doi.org/10.2139/ssrn.2916656

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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