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

Published online by Cambridge University Press:  19 September 2017

Stéphane Auray  and
Aurélien Eyquem
Stéphane Auray*
Affiliation:
CREST-Ensai and ULCO
Aurélien Eyquem
Affiliation:
Université Lumière Lyon 2
*
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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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.

Keywords

Sovereign Default RiskFinancial CrisisFiscal Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 5 , July 2019 , pp. 2114 - 2131
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

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.”

References

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