English   español  
Please use this identifier to cite or link to this item: http://hdl.handle.net/10261/4539
Share/Impact:
Statistics
logo share SHARE   Add this article to your Mendeley library MendeleyBASE
Visualizar otros formatos: MARC | Dublin Core | RDF | ORE | MODS | METS | DIDL
Exportar a otros formatos:
Title

In Search of a Theory of Debt Management

AuthorsFaraglia, Elisa ; Marcet, Albert ; Scott, Andrew
KeywordsComplete Markets
Debt Management
Government Debt
Maturity Structure
Yield Curve
Issue Date7-May-2008
SeriesUFAE and IAE Working Papers
743.08
AbstractA growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets.
We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt-policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued.
We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings.
We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.
DescriptionTrabajo publicado como artículo en Journal of Monetary Economics 57(7): 821-836 (2010).-- http://dx.doi.org/10.1016/j.jmoneco.2010.08.005
URIhttp://hdl.handle.net/10261/4539
Appears in Collections:(IAE) Informes y documentos de trabajo
Files in This Item:
File Description SizeFormat 
74308.pdf378,08 kBAdobe PDFThumbnail
View/Open
Show full item record
Review this work
 


WARNING: Items in Digital.CSIC are protected by copyright, with all rights reserved, unless otherwise indicated.