Debt Maturity: Does It Matter for Fiscal Space?

December 9, 2015

Preview Citation

Format: Chicago

Jun I Kim. Debt Maturity: Does It Matter for Fiscal Space?, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines how debt maturity affects the debt limit, defined as the maximum amount of debt a government can afford without defaulting. We develop a model where investors are risk neutral, the primary balance is stochastic but exogenous, and default occurs solely due to the government’s inability to pay. We find that debt limit is higher for long-term debt. Underlying this finding is the intrinsic advantage of long-term debt to price in future upside potential in fiscal outcomes in its current price. Such advantage makes long-term debt effectively cheaper than short-term debt at the margin, and leads to a higher debt limit. Simulation results suggest that the effect of debt maturity on debt limit could be substantial—particularly, if fiscal outcomes are subject to large uncertainty.

Subject: Asset and liability management, Asset prices, Bonds, Debt default, Debt limits, External debt, Financial institutions, Fiscal policy, Fiscal stance, Prices

Keywords: Asset prices, Bond price, Bonds, Current price, Debt contract, Debt default, Debt limit, Debt limit schedule, Debt limits, Debt maturity, Debt stress warning, Debt sustainability, Default probability, Fiscal space, Fiscal stance, Global, Long-duration bond, Long-term debt, Short-term debt, Sovereign default, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/257
Stock No:

WPIEA2015257
ISBN:

9781513511931
ISSN:

1018-5941

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