Seminars

Lunch Seminar: Juan Passadore - EIEF

October 25, 2017
1:00 pmto2:00 pm

Optimal Debt-Maturity Management (with Saki Bigio and Galo Nuno)

Abstract:

We develop a methodology to solve the problem of a government that wants to smooth its financial expenses by choosing over a continuum of bonds of different maturities. The planner takes into account that adjusting debt too fast can cause a price impact. At the same time, it wants to insure against several sources of risk: (a) income-flow risk, (b) the yield-curve can unexpectedly change to any shape, (c) prices can suddenly become more sensitive to issuance’s, and (d) the incentives to default may change. Our main contribution is to characterize the solution of the infinite dimensional control problem when the distribution of debt is a state variable. Aided with this characterization we explore the implications of shocks to income, interest rate, and incentives on the portfolio of government debt.