Working Paper: NBER ID: w25808
Authors: Saki Bigio; Galo Nuo; Juan Passadore
Abstract: We characterize the optimal debt-maturity management problem in the presence of liquidity costs. A government issues an arbitrary number of finite-maturity bonds and faces income and interest-rate risk, which can tempt it to default. Optimal issuances are spread out across maturities and are given by the ratio of a value gap over a liquidity coefficient that measures the price impact. The value gap is the proportional difference between the bond prices obtained by discounting with the international interest rates and with the domestic discount factor. This characterization allows us to quantify the contribution of different economic forces—impatience, yield-curve riding, expenditure smoothing, self-insurance, credit risk, and default incentives—in shaping the optimal debt maturity distribution. In an application, we estimate the liquidity coefficients using Spanish debt auction data and exploit the framework to evaluate Spanish debt management practices.
Keywords: debt maturity management; liquidity costs; government bonds; auction prices
JEL Codes: F34; F41; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity costs (G33) | auction prices (D44) |
| monthly issuances over annual GDP (P24) | auction prices (D44) |
| value gap (D46) | optimal issuance strategy (G12) |
| optimal issuance strategy (G12) | debt issuance (H63) |
| expenditure smoothing (D15) | optimal debt maturity distribution (H63) |
| yield curve riding (E43) | optimal debt maturity distribution (H63) |