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Debt Maturity: Does It Matter for Fiscal Space?
Author: Mr. Jun I Kim
Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 257
Language:
English
Publication Date:
09 Dec 2015
DOI:
https://doi.org/10.5089/9781513511931.001
ISBN:
9781513511931
ISSN:
1018-5941
Pages:
26
Keywords:
WP; long-term debt; short-term debt; sovereign default; debt maturity; fiscal space; debt limit; debt sustainability; bond price; debt stress warning; default probability; debt limit schedule; debt contract; current price; long-duration bond; Debt limits; Asset prices; Fiscal stance; Debt default; Bonds; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund