On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions

Stéphane Auray (1) , Aurélien Eyquem (2)

1 CREST - Centre de Recherche en Économie et Statistique
2 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne

We develop a model with financial frictions and sovereign default risk where 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. Abstract We develop a model with financial frictions and sovereign default risk where 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.

Mots clés: Sovereign Default Risk; Financial Crisis; Fiscal Policy

Domaines: Economies et finances

Stéphane Auray, Aurélien Eyquem. On the Role of Debt Maturity in a Model with Sovereign Risk and Financial Frictions. 2017. ⟨halshs-01467214⟩