Working Paper: CEPR ID: DP7093
Authors: Dirk Niepelt
Abstract: I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long-term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence.
Keywords: debt; default; maturity structure; no commitment
JEL Codes: E62; F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of commitment (J22) | maturity structure of sovereign debt (H63) |
| debt issuance levels (H63) | maturity structure (G32) |
| government choices regarding debt issuance (H63) | maturity structure (G32) |
| economic conditions (E66) | maturity structure (G32) |