Working Paper: CEPR ID: DP13729
Authors: Roel Beetsma; Massimo Giuliodori; Jesper Hanson; Frank de Jong
Abstract: We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off the preference for liquidity services provided by short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theory. A forecast error variance decomposition suggests that changes in the probability of non-repayment as captured by the expected default frequency extracted from credit default spreads are the most important source of shocks.
Keywords: maturity; euroarea; public debt; auctions; yield curve; liquidity services of short debt; risk aversion; expected repayment probability
JEL Codes: G11; G12; G18; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average maturity of newly issued public debt (H63) | yield curve level (E43) |
| average maturity of newly issued public debt (H63) | yield curve slope (E43) |
| risk aversion (D81) | yield curve level (E43) |
| risk aversion (D81) | yield curve slope (E43) |
| repayment risk (F34) | yield curve level (E43) |
| repayment risk (F34) | yield curve slope (E43) |
| liquidity demand (E41) | yield curve level (E43) |
| liquidity demand (E41) | yield curve slope (E43) |
| risk aversion (D81) | average maturity of newly issued public debt (H63) |
| repayment risk (F34) | average maturity of newly issued public debt (H63) |
| liquidity demand (E41) | average maturity of newly issued public debt (H63) |