DP13729 The Maturity of Sovereign Debt Issuance in the Euro Area
|Author(s):||Roel Beetsma, Frank de Jong, Massimo Giuliodori, Jesper Hanson|
|Publication Date:||May 2019|
|Keyword(s):||euro-area public debt auctions, expected repayment probability, liquidity services of short debt, Maturity, risk aversion, yield curve|
|JEL(s):||E62, G11, G12, G18|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13729|
We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off preference for liquidity services of short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theory. A forecast error variance decomposition suggests that changes in non-repayment risk as captured by credit default spreads are the most important source of shocks.