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ON THE ROLE OF DEBT MATURITY IN A MODEL WITH SOVEREIGN RISK AND FINANCIAL FRICTIONS

  • Stéphane Auray (a1) and Aurélien Eyquem (a2)
Abstract

We develop a model with financial frictions and sovereign default risk wherein the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.

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Corresponding author
Address correspondence to: Stéphane Auray, Ensai, Campus Ker Lann, Rue Blaise Pascal BP37203, 35172 Bruz Cedex, France; e-mail: stephane.auray@ensai.fr.
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We would like to thank the associate editor and two anonymous referees for remarks and suggestions. All remaining errors are our own. The authors gratefully acknowledge financial support of the ANR FIRE (15-CE33-0001) as well as of the Chair ACPR/Risk Foundation: “Regulation and Systemic Risk.”

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References
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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