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The Commitment Benefit of Consols in Government Debt Management†

The Commitment Benefit of Consols in Government Debt Management† AbstractWe 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. (JEL E62, G12, H61, H63) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review: Insights American Economic Association

The Commitment Benefit of Consols in Government Debt Management†

The Commitment Benefit of Consols in Government Debt Management†

American Economic Review: Insights , Volume 4 (2) – Jun 1, 2022

Abstract

AbstractWe 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. (JEL E62, G12, H61, H63)

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Publisher
American Economic Association
Copyright
Copyright © 2022 © American Economic Association
ISSN
2640-205X
eISSN
2640-2068
DOI
10.1257/aeri.20210341
Publisher site
See Article on Publisher Site

Abstract

AbstractWe 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. (JEL E62, G12, H61, H63)

Journal

American Economic Review: InsightsAmerican Economic Association

Published: Jun 1, 2022

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