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Maturity Composition and the Demand for Government Debt

Author

Listed:
  • Jason Allen

    (Bank of Canada)

  • Jakub Kastl

    (Princeton University)

  • Milena Wittwer

    (Boston College)

Abstract
We analyze ways to reduce funding costs when issuing government debt, without changing the level of debt. Leveraging an institutional feature that auctions of different Treasury securities are held simultaneously, we propose and implement a method for estimating own-and cross-security demand elasticities, avoiding the usual endogeneity issues in demand estimation. We show that these elasticities, together with the auction format, determine how to optimally allocate debt across securities. Starting from an equal supply split between two securities, a government can save money by issuing less of the price-sensitive and more of the price-insensitive security in a discriminatory price auction, and vice versa in a uniform price auction.

Suggested Citation

  • Jason Allen & Jakub Kastl & Milena Wittwer, 2022. "Maturity Composition and the Demand for Government Debt," Working Papers 2022-12, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2022-12
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    File URL: http://www.princeton.edu/~jkastl/dealers_202203.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jason Allen & Milena Wittwer, 2023. "Centralizing Over-the-Counter Markets?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3310-3351.
    2. Albuquerque, Rui & Costa, José & Faias, Jose, 2022. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," CEPR Discussion Papers 17095, C.E.P.R. Discussion Papers.
    3. Wittwer, Milena, 2020. "Interconnected pay-as-bid auctions," Games and Economic Behavior, Elsevier, vol. 121(C), pages 506-530.

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    More about this item

    Keywords

    Multi-unit auctions; structural estimation; market segmentation; government bonds; demand elasticities;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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