Alfaro, Laura. <br/><br/>
Debt Maturity:  Is Long-Term Debt Optimal? / 
Laura Alfaro, Fabio Kanczuk. 
 - Cambridge, Mass.  National Bureau of Economic Research  2007. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w13119 .
 - Working Paper Series (National Bureau of Economic Research)  no. w13119. .
<br/><br/> May 2007. 
<br/><br/> 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. 
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