Impact of Sovereign Debt Maturity on Fiscal Sustainability

ABSTRACT This study is the first to investigate the impact of the term structure of public debt on fiscal sustainability. We adopt the widely used backward‐looking measure of fiscal sustainability—fiscal responsiveness as proposed by Bohn. Using data from De Graeve and Mazzolini and focusing on a sample of 19 most developed countries, we demonstrate that sovereign borrowing with maturity above 10 years significantly reduces fiscal responsiveness. Conversely, public debt with maturity between 3 and 5 years is associated with the highest responsiveness of the primary balance to public debt. The findings indicate that the increase of long‐term public debt since the beginning of this century has contributed to reducing fiscal responsiveness by half. Furthermore, unconventional monetary policy, by suppressing yields at longer maturities, has likely played a key role in the discovered relationship.