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A Framework for Debt-Maturity Management

Saki Bigio, Galo Nuño, Juan Passadore

NBER Working Paper No. 25808
Issued in May 2019
NBER Program(s):Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program

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.

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Document Object Identifier (DOI): 10.3386/w25808

 
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