« Back to Results

Debt Management and Optimal Taxation

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, International 9
Hosted By: American Economic Association
  • Chair: Pierre Yared, Columbia University

The Optimal Maturity of Government Debt

Anmol Bhandari
University of Minnesota
David Evans
University of Oregon
Mikhail Golosov
University of Chicago
Thomas J. Sargent
New York University


A Ramsey planner chooses a distorting tax on labor and manages a portfolio of
bonds of different maturities in a representative agent economy with aggregate shocks.
Covariances of bonds’ returns with the primary deficit are key determinants of Ramsey
portfolios. We estimate these moments in U.S. data and calibrate a model with a
representative agents who has Epstein-Zin preferences that matches these moments.
The implied optimal portfolio does not short any bond and allocates approximately
equal portfolio shares to bonds of different maturities, slightly tilt towards longer
maturities when the outstanding debt is large, and requires little re-balancing in
response to aggregate shocks. These portfolio prescriptions differ from those of models
often used in the business cycle literature. The differences are driven by counterfactual
asset pricing implications of the standard models.

Optimal Taxation and Debt Management without Commitment

Davide Debortoli
Pompeu Fabra University
Ricardo Nunes
University of Surrey
Pierre Yared
Columbia University


This paper considers optimal fiscal policy in a deterministic Lucas and Stokey
(1983) economy in the absence of government commitment. In every period, the
government chooses a labor income tax and issues any unconstrained maturity structure
of debt as a function of its outstanding debt portfolio. We find that the solution
under commitment cannot always be sustained through the appropriate choice of
debt maturities, a result which contrasts with previous conclusions in the literature.
This is because a government today cannot commit future governments to a particular
side of the Laffer curve, even if it can commit them to future revenues. We find
that the unique stable debt maturity structure under no commitment is flat, with
the government owing the same amount of resources to the private sector at all future
dates. We present examples in which the maturity structure converges to such
a flat distribution over time. In cases where the commitment and no-commitment
solutions do not coincide, debt converges to the natural debt limit.

A Framework for Debt-Maturity Management

Saki Bigio
University of California-Los Angeles
Galo Nuno
Bank of Spain
Juan Passadore
Einaudi Institute for Economics and Finance


We characterize the optimal debt-maturity management of an impatient government in a small open-economy. The Government issues a continuum of finite-life bonds that differ in their maturity. It takes into account the price impact of each issuance. The optimal issuance of any bond equals the product of the liquidity coefficient times the difference between the market price and the domestic valuation. This property holds in presence of income or interest-rate risk and the option to default. The model sheds light on the different forces that shape an optimal maturity distribution.

Greed versus Fear: Optimal Time-Consistent Taxation with Default

Anastasios Karantounias
Federal Reserve Bank of Atlanta


This paper studies the optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues non-contingent debt in order to finance an exogenous stochastic stream of fiscal shocks. Debt can be repudiated subject to some default costs. Optimal policy is characterized by two opposing incentives: an incentive to postpone taxes by issuing more debt for the future (``greed''), and an incentive to tax more currently in order to avoid punishing default premia (``fear''). A Generalized Euler Equation (GEE) captures these two effects and determines the optimal back-loading or front-loading of tax distortions. Even if default risk is small, tax-smoothing is severely limited. The same mechanisms operate also in environments with long-term debt.
George-Marios Angeletos
Massachusetts Institute of Technology
Manuel Amador
University of Minnesota
Thomas Winberry
University of Chicago
Satyajit Chatterjee
Federal Reserve Bank of Philadelphia
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H6 - National Budget, Deficit, and Debt