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28 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers COMMENT Janice Eberly Greenwood, Hanson, Rudolph, and Summers bring together academic research , practical experience in policy, and empirical observation to inform debt management, in particular the maturity structure of debt, in concert with monetary policy. Undertaking this project recognizes the singular position of monetary and fiscal policy during and after the global financial crisis of 2008–09. Monetary policy in the United States and elsewhere went to extraordinary lengths to support markets and the economy, driving the policy rate to zero and then directly transacting in asset markets through quantitative easing. While fiscal policy also undertook extraordinary measures , this chapter addresses an often-undervalued component of fiscal policy: the issuance of the debt that finances a fiscal deficit. While often seen as passive or at most technocratic, in a financial crisis the maturity structure of the available debt may itself be a policy instrument. In fact, if quantitative easing affects the real economy through the demand for Treasury assets, then the maturity structure of Treasury issuance must also affect the real economy through the supply of those same assets. In other words, an alternative to quantitative easing may be to issue fewer longer-term Treasuries in the first place, a point on which the authors elaborate in chapter 2. Before addressing the substantive points made here, it is worth remarking on the methodology, which threads the needle between academic methods of empirical analysis and modeling, together with a practical policy application . This can be more difficult than it appears (especially when it is done well), because policy applications are legitimately fraught with institutional features and exceptions to the simple frameworks used by academics. But the simple frameworks have the advantage of cutting through unnecessary detail to reveal the essential features of the issue. In my reading, the authors strike this balance carefully. While we can always quibble about what constitutes the essential features of an issue, the authors have a framework that highlights the issues they emphasize. Figure 1-1 demonstrates the importance of the issues at hand. The figure shows that the maturity structure of Treasury debt lengthened over the last decade or so, as it often does when the debt-to-GDP ratio rises. The Treasury’s The Optimal Maturity of Government Debt 29 traditional argument for lengthening the maturity structure is simple: the Treasury is generally interested in financing the nation’s debt at the lowest cost and greatest stability. Long rates appeared relatively favorable over this period relative to historical levels, though not relative to short rates (more on this point later). Looking at the same data, the Federal Reserve had a different objective: It wanted to put downward pressure on the rates of longer-term non-Treasury assets to promote private investment and economic activity for entities that cannot borrow at the Treasury rate. Hence, the Fed purchased long-term Treasuries (and agency mortgage-backed securities ) and held them on their balance sheet. So to the extent that the amount of Treasury debt in the hands of the public influenced the effectiveness of quantitative easing, the Treasury was working at cross-purposes to the Fed. The conclusion of this logic is that the Treasury can’t have it both ways: it can’t both minimize its cost of funding and support countercyclical debt management policy, at least in the circumstances of the financial crisis. This episode is a natural place to begin a broader discussion of the objectives of Treasury debt management and the maturity structure of the Federal debt. This chapter identifies four broad objectives: (1) minimize funding cost, (2) stability of financing, (3) countercyclical aggregate demand policy, and (4) liquidity and financial stability. The first two are the traditional objectives identified by debt managers; the second two have been highlighted more recently in light of the financial crisis and unconventional monetary policies. This chapter investigates the quantitative importance of the cost factors in (1) and (2), and what we have learned so far about (3), which will be covered further in chapter 2, while drawing greater attention to the role of (4), which is the most difficult to quantify. As soon as we identify multiple objectives for a single tool, in this case the maturity structure of the debt, we are likely to face trade-offs. The authors’ first quantitative point is that these objectives need not always be at crosspurposes . When the Treasury term premium was higher, the authors...


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