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A New Structure for U.S. Federal Debt 143 liquid, money-like instruments.16 In the spirit of my earlier discussion, Treasury could better serve the market by serving more of this demand. Appendix: Perpetual Bonds with Decaying Coupon Rates Cochrane’s other potential compromise to meet the demand for intermediatematurity securities would have Treasury issue perpetual notes whose coupon rates decline geometrically with maturity. For example, if the yield curve is flat at some rate y, a perpetual note whose coupons decline at a proportional rate of g per year would have a duration of 1/(r + g). Duration, or valued-weighted average maturity, is a standard measure of the sensitivity of the market value of a bond to changes in yields. For example, a perpetual whose coupons decay at 4 percent per year would have a duration of ten years when its yield is 6 percent. A downside, however, is that if recessionary monetary conditions were to push the yield of this note down to 1 percent, its duration would then zoom out to 1/(0.01 + 0.04) = 20 years. The duration of a conventional ten-year Treasury note would increase only modestly in this scenario, from about 7.7 years when issued at a 6 percent yield to about 8.1 years when its yield drops to 1 percent. From a risk management viewpoint, bond investors generally tend to prefer low duration sensitivity. Treasury would find itself under pressure to issue various bonds with different geometric coupon decay rates to serve various different maturity-specific clienteles, and then to add a further variety of bonds over time in order to compensate for changes in the yield curve. While Treasury could probably maintain adequate liquidity for a relatively rich menu of bonds with different coupon decay rates, this approach seems to defeat much of the simplicity of Cochrane’s original scheme. This approach would also raise quite a fuss in the investment community because of the operational costs of dealing with bonds whose coupon income is declining over time. References Aguiar, Mark, and Manuel Amador. 2014. “Sovereign Debt,” in Handbook of International Economics, vol. 4, edited by Elhanan Helpman, Kenneth Rogoff, and Gita Gopinath (Oxford: Elsevier), pp. 647–687. Ang, Andrew, Richard Green, and Yuang Xing. 2013. “Advance Refundings of Municipal Bonds,” working paper (New York: Columbia Business School). 16. See, for example, McCormick (2015). 144 J. H. Cochrane Angeletos, George. 2002. “Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure.” Quarterly Journal of Economics 117: 1105–31. Atkeson, Andrew, V. V. Chari, and Patrick Kehoe. 1999. “Taxing Capital Income: A Bad Idea.” Federal Reserve Bank of Minneapolis, Quarterly Review 23: 3–17 ( Barro, Robert J. 1999. “Notes on Optimal Debt Management.” Journal of Applied Economics 2: 281–89. Borensztein, Eduardo, and Paolo Mauro. 2004. “The Case for GDP-Indexed Bonds.” Economic Policy 19: 166–216. Bulow, Jeremy, and Kenneth Rogoff. 1989. “Sovereign Debt: Is to Forgive to Forget ?” American Economic Review 79: 43–50. Campbell, John Y., Robert J. Shiller, and Luis M. Viceira. 2009. “Understanding Inflation-Indexed Bond Markets.” Brookings Papers on Economic Activity (Spring): 79–120 ( /2009a_bpea_campbell.pdf). Campbell, John Y., and Luis M. Viceira. 2001. “Who Should Buy Long-Term Bonds?” American Economic Review 91: 99–127. Chamley, Christophe. 1986. “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives.” Econometrica 54, no. 3: 607–22. Chamley, Christophe, and Heracles Polemarchakis. 1984. “Assets, General Equilibrium , and the Neutrality of Money.” Review of Economic Studies 51: 129–38. Cochrane, John H. 2001. “Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level.” Econometrica 69, no. 1: 69–116. ———. 2005. “Money as Stock.” Journal of Monetary Economics 52: 501–28. ———. 2014a. “A Mean-Variance Benchmark for Intertemporal Portfolio Theory.” Journal of Finance 69: 1–49. doi: 10.1111/jofi.12099. ———. 2014b. “Monetary Policy with Interest on Reserves.” Journal of Economic Dynamics and Control 49: 74–108. ———. 2014c. “Toward a Run-Free Financial System,” in Across the Great Divide: New Perspectives on the Financial Crisis, edited by Martin Neil Baily and John B. Taylor (Stanford, Calif.: Hoover Institution Press), pp. 197–249. Coleman, Thomas S., Lawrence Fisher, and Roger C. Ibbotson. 1993. Historical U.S. Treasury Yield Curves. Chicago: Ibbotson Associates. Debortoli, Davide, Ricardo Nunes, and Pierre Yared. 2014. “Optimal Government Debt Maturity,” manuscript, Columbia University ( /faculty/pyared/papers/maturity.pdf...


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