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Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model

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Author Info
Calvo, Guillermo A
Guidotti, Pablo E
Abstract

The role of debt maturity is analyzed in a framework that blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities. Three conclusions emerge: (1) nominal debt leads policymakers to resort to inflation even though, in equilibrium, inflation collects no revenue; (2) when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level, the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment; and (3) management of debt maturity is an essential component of the equilibrium policy. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 33 (1992)
Issue (Month): 4 (November)
Pages: 895-919
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Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:895-919

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "The Forgotten History of Domestic Debt," NBER Working Papers 13946, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. M. Hashem Pesaran, 2000. "The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  3. Beetsma,Roel M.W.J. & Bovenberg,A. Lans, 1995. "The role of public debt in the game of double chicken," Research Memoranda 025, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  4. Garima Vasishtha, 2007. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Working Papers 07-33, Bank of Canada. [Downloadable!]
  5. Danyang Xie, 2002. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Macroeconomics 0212004, EconWPA. [Downloadable!]
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  6. Hakan Berument & M. Eray Yücel, 2005. "Return and Maturity Relationships for Treasury Auctions : Evidence from Turkey," Departmental Working Papers 0511, Bilkent University, Department of Economics. [Downloadable!]
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  7. Ilan Goldfajn, 1998. "Public Debt Indexation and Denomination: The Case of Brazil," Working Papers Central Bank of Chile 27, Central Bank of Chile. [Downloadable!]
  8. Joshua Aizenman & Ricardo Hausmann, 1994. "Why is Inflation Skewed? A Debt and Volatility Story," NBER Working Papers 4837, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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