TY  - JOUR
AU  - Alfaro,Laura
AU  - Kanczuk,Fabio
TI  - Debt Maturity: Is Long-Term Debt Optimal?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13119
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13119
L1  - http://www.nber.org/papers/w13119.pdf
N1  - Author contact info:
Laura Alfaro
Harvard Business School
Morgan Hall 263
Soldiers Field
Boston, MA 02163
Tel: 617/495-7981
Fax: 617/496-5985
E-Mail: lalfaro@hbs.edu

Fabio Kanczuk
University of São Paulo
R. Dr Alberto Cardoso de Melo Neto 110/131A
Sao Paulo-S.P.-CEP 01455-100
BRAZIL
Tel: 55-11-3814-9749
E-Mail: kanczuk@usp.br
AB  - We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels. 
ER  -