Debt Maturity: Is Long-Term Debt Optimal?

38 Pages Posted: 27 Jun 2007 Last revised: 8 May 2021

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Fabio Kanczuk

University of São Paulo (USP) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.

Suggested Citation

Alfaro, Laura and Kanczuk, Fabio, Debt Maturity: Is Long-Term Debt Optimal? (May 2007). NBER Working Paper No. w13119, Available at SSRN: https://ssrn.com/abstract=988930

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Fabio Kanczuk

University of São Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-900
Brazil
011-55-11-818-5915 (Phone)
011-55-11-3661-7333 (Fax)

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