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  • August 2015
  • Article
  • Journal of Finance

A Comparative-Advantage Approach to Government Debt Maturity

By: Robin Greenwood, Samuel G. Hanson and Jeremy C. Stein
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Abstract

We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of short-term, money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk and, hence, should aim to partially crowd out the private sector's use of short-term debt.

Keywords

Sovereign Finance; Debt Securities

Citation

Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "A Comparative-Advantage Approach to Government Debt Maturity." Journal of Finance 70, no. 4 (August 2015): 1683–1722. (2015 Brattle Group Distinguished Paper for an outstanding corporate finance paper published in the Journal of Finance. Internet Appendix Here.)
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About The Authors

Robin Greenwood

Finance
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Samuel G. Hanson

Finance
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More from the Authors

    • 2020
    • Faculty Research

    Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates

    By: Samuel G. Hanson, David O. Lucca and Jonathan H. Wright
    • Fall 2020
    • Brookings Papers on Economic Activity

    Sizing Up Corporate Restructuring in the COVID Crisis

    By: Robin Greenwood, Benjamin Iverson and David Thesmar
    • Fall 2020
    • Brookings Papers on Economic Activity

    Business Credit Programs in the Pandemic Era

    By: Samuel Gregory Hanson, Adi Sunderam, Jeremy C. Stein and Eric Zwick
More from the Authors
  • Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates By: Samuel G. Hanson, David O. Lucca and Jonathan H. Wright
  • Sizing Up Corporate Restructuring in the COVID Crisis By: Robin Greenwood, Benjamin Iverson and David Thesmar
  • Business Credit Programs in the Pandemic Era By: Samuel Gregory Hanson, Adi Sunderam, Jeremy C. Stein and Eric Zwick
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