An Empirical Analysis of the Likely Impact of Shortening the Maturity Structure of the Federal Government Debt in the United States

This study investigates the proposal to reduce the ratio of longer-term interest rates to short-term interest rates in the United States by shortening the maturity structure of the federal (central) government debt. The estimates presented provide very strong empirical support for such a policy but only if it involves financing borrowing needs by increasing the rate of sales of Treasury debt obligations maturing within one year. Such a policy will likely reduce long-term interest rates relative to short-term rates and thereby stimulate capital formation and economic growth. However, if shortening the maturity structure of the federal debt is accomplished through sales of Treasury obligations maturing in one to five years or one to ten years, longer-term interest rates may actually rise relative to short term rates and slow economic expansion.