The Optimality of Consols in Government Debt Management∗

We consider optimal government debt maturity in a deterministic economy in which the government can issue any arbitrary maturity structure and in which bond prices are a function of the government’s current primary surplus and the path of future primary surpluses. The government sequentially chooses policy, taking into account how the current primary surplus and the structure of maturity issuance— which impacts future policy—feed back into current bond prices. We establish conditions under which, in the long-run, the unique stable debt maturity structure is flat, with the government owing the same amount of resources to the private sector at all future dates. Our analysis provides a theoretical foundation for the optimal use of consols in government debt management, and we show that the short-run welfare benefits of transitioning to consols are substantive, at the expense of small long-run costs.