Debt Maturity : Does It Matter for Fiscal Space?

Author/Editor:

Jun I Kim

Publication Date:

December 9, 2015

Electronic Access:

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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.

Series:

Working Paper No. 15/257

Subject:

English

Publication Date:

December 9, 2015

ISBN/ISSN:

9781513511931/1018-5941

Stock No:

WPIEA2015257

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

26

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