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  • Review of International Economics

Debt Maturity: Is Long-Term Debt Optimal?

By: Laura Alfaro and Fabio Kanczuk
  • Format:Print
  • | Pages:16
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Abstract

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.

Keywords

Borrowing and Debt; Investment Return; Development Economics; Taxation; Risk and Uncertainty; Cost; Interest Rates; Developing Countries and Economies; Welfare; United States; Brazil

Citation

Alfaro, Laura, and Fabio Kanczuk. "Debt Maturity: Is Long-Term Debt Optimal?" Review of International Economics 17, no. 5 (November 2009): 890–905. (Also Harvard Business School Working Paper, No. 06-005 and NBER Working Paper No. 13119.)
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About The Authors

Laura Alfaro

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Fabio Kanczuk

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More from the Authors
  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
  • El Salvador: Launching Bitcoin as Legal Tender By: Laura Alfaro, Carla Larangeira and Ruth Costas
  • Can Evidence-Based Information Shift Preferences Towards Trade Policy? By: Laura Alfaro, Maggie X. Chen and Davin Chor
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