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The Commitment Benefit of Consols in Government Debt Management

  • Davide Debortoli
  • Ricardo Nunes
  • Pierre Yared
American Economic Review: Insights
vol. 4, no. 2, June 2022
(pp. 255-70)
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Abstract

We consider optimal government debt maturity in a deterministic economy in which the government can issue any arbitrary debt maturity structure and in which bond prices are a function of the government's current and future primary surpluses. The government sequentially chooses policy, taking into account how current choices—which impact future policy—feed back into current bond prices. We show that issuing consols constitutes the unique stationary optimal debt portfolio, as it boosts government credibility to future policy and reduces the debt financing costs.

Citation

Debortoli, Davide, Ricardo Nunes, and Pierre Yared. 2022. "The Commitment Benefit of Consols in Government Debt Management." American Economic Review: Insights, 4 (2): 255-70. DOI: 10.1257/aeri.20210341

Additional Materials

JEL Classification

  • E62 Fiscal Policy
  • G12 Equities; Fixed Income Securities
  • H61 National Budget; Budget Systems
  • H63 National Debt; Debt Management; Sovereign Debt