Debt-Maturity Management with Liquidity Costs

47 Pages Posted: 7 May 2019 Last revised: 9 Jul 2021

See all articles by Saki Bigio

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics

Galo Nuno

Banco de España

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

We characterize the optimal debt-maturity management problem in the presence of liquidity costs. A government issues an arbitrary number of finite-maturity bonds and faces income and interest-rate risk, which can tempt it to default. Optimal issuances are spread out across maturities and are given by the ratio of a value gap over a liquidity coefficient that measures the price impact. The value gap is the proportional difference between the bond prices obtained by discounting with the international interest rates and with the domestic discount factor. This characterization allows us to quantify the contribution of different economic forces—impatience, yield-curve riding, expenditure smoothing, self-insurance, credit risk, and default incentives—in shaping the optimal debt maturity distribution. In an application, we estimate the liquidity coefficients using Spanish debt auction data and exploit the framework to evaluate Spanish debt management practices.

Suggested Citation

Bigio, Saki and Nuno, Galo and Passadore, Juan, Debt-Maturity Management with Liquidity Costs (May 2019). NBER Working Paper No. w25808, Available at SSRN: https://ssrn.com/abstract=3383307

Saki Bigio (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Galo Nuno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Juan Passadore

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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