Take the Short Route: Equilibrium Default and Debt Maturity / Mark Aguiar, Manuel Amador, Hugo Hopenhayn, Iván Werning.

Format:

Book

Author/Creator:

Aguiar, Mark.

Contributor:

National Bureau of Economic Research.

Amador, Manuel.

Hopenhayn, Hugo.

Werning, Iván.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22847.

NBER working paper series no. w22847

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Take the Short Route

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We study the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances. Our main finding is that under a wide range of conditions the sovereign should, as long as default is not preferable, remain passive in long-term bond markets, making payments and retiring long-term bonds as they mature but never actively issuing or buying back such bonds. The only active debt-management margin is the short-term bond market. We show that any attempt to manipulate the existing maturity profile of outstanding long-term bonds generates losses, as bond prices move against the sovereign. Our results hold regardless of the shape of the yield curve. The yield curve captures the average costs of financing at different maturities but is misleading regarding the marginal costs.

Notes:

Print version record

November 2016.