OPTIMAL MATURITY OF NOMINAL GOVERNMENT DEBT - AN INFINITE-HORIZON MODEL

The role of debt maturity is analyzed in a framework which blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities. Three conclusions emerge: 1) Nominal debt leads policymakers to resort to inflation even though, in equilibrium, inflation collects no revenue; 2) when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level, the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment; 3) management of debt maturity is an essential component of the equilibrium policy.