A Comparative-Advantage Approach to Government Debt Maturity





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    • Greenwood and Hanson are with Harvard Business School. Stein is with Harvard University. We thank Robert Barro, Markus Brunnermeier, John Campbell, Martin Eichenbaum, Michael Fleming, Ken Froot, Kenneth Garbade, Julio Rotemberg, Andrei Shleifer, Ken Singleton (the Editor), Erik Stafford, Adi Sunderam, Matt Weinzierl, an anonymous referee and Associate Editor, and seminar participants at 2010 NBER Corporate Finance Meetings, Bocconi University, Federal Reserve Board, Harvard University, London School of Economics, New York University, Ohio State University, University of California Berkeley, University of California Los Angeles, University of California San Diego, and University of Miami for helpful comments and suggestions and we are grateful to Peggy Moreland for editorial assistance.


We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We extend the model to allow private financial intermediaries to compete with the government in the provision of short-term money-like claims. We argue that, if there are negative externalities associated with private money creation, the government should tilt its issuance more toward short maturities, thereby partially crowding out the private sector's use of short-term debt.