Debt maturity
Subtitle: is long-term debt optimal?
By: Laura Alfaro, Fabio Kanczuk.
Contributors: Kanczuk, Fabio, 1969-; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13119.; Working paper series (National Bureau of Economic Research) -- no. 13119.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 36
Subjects: Debts, Public -- Mathematical models; Debts, Public -- Brazil -- Mathematical models; Debts, Public -- United States -- Mathematical models
Description: 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.
Notes: "May 2007"

Includes bibliographical references (p. 25-27).