Working Paper
Sudden stops, time inconsistency, and the duration of sovereign debt
Abstract: We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: Governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.
Keywords: Debt;
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Bibliographic Information
Provider: Federal Reserve Bank of Richmond
Part of Series: Working Paper
Publication Date: 2013
Number: 13-08