Maturity Composition of Government Debt and the Macroeconomy: Empirical Effects

The recent macroeconomic crisis (the Great Recession) has rendered traditional macroeconomic policy largely powerless. Central banks around the world have dramatically reduced their policy interest rates to the bare minimum. Fiscal authorities have been reluctant to pursue overly expansive policies, for a range of reasons. In response, central banks have turned towards an alternative means to achieve higher growth and inflation closer to target, Quantitative Easing (QE): by buying massive amounts of long term government debt, the central bank increases the demand and thus the price of long term bonds in the market. As a result, long term interest rates fall, thus stimulating economic activity. Quantitative Easing effectively boils down to changing both the size of the government debt outstanding in the market, as well as its maturity composition. While there is a lot of research on the size of national debt, the maturity composition is an under-researched area. The project asks how the government’s maturity choice is intertwined with the macroeconomy. The research investigates how government maturity interventions affect business cycles. In turn, it also evaluates how government debt maturity reacts to the business cycle. The research is empirical in nature, and thereby seeks to provide stylized facts to enable evaluating recent theoretical research.