A Framework for Debt-Maturity Management
93 Pages Posted: 28 Jun 2019 Last revised: 17 Jul 2019
Date Written: June 27, 2019
We characterize the optimal debt-maturity management problem of a government in a small open economy. The government issues a continuum of finite-maturity bonds in the presence of liquidity frictions. We find that the solution can be decentralized: the optimal issuance of a bond of a given maturity is proportional to the difference between its market price and its domestic valuation, the latter defined as the price computed using the government’s discount factor. We show how the steady-state debt distribution decreases with maturity. These results hold when extending the model to incorporate aggregate risk or strategic default.
Keywords: debt maturity, debt management, liquidity costs
JEL Classification: F34, F41, G11
Suggested Citation: Suggested Citation