Public Debt Management

Public Debt Management

Public Debt Management

Public Debt Management

Synopsis

The choice of currency denomination, indexation, and maturity structure of public debt is an increasingly important aspect of policy in a world of high debts and and financially integrated markets. This book surveys theories and evidence on public debt composition and debt returns with the goal of emphasizing the main policy issues. The effects of debt management on financial markets, risk-sharing, policy credibility, interest costs, and taxation are evaluated within a unified theoretical framework. The analysis clarifies the trade-off involved in policy decisions and shows how to use theory and evidence to answer practical policy problems. This book is a valuable reference to researchers and satisfies the increasing demand by policymakers for sound economic principles to guide the choice of debt instruments.

Excerpt

High levels of public debt are a common feature of modern economies. This fact, combined with the increased liberalization and sophistication of financial markets, has brought debt management to the forefront of economic policy issues.

As the debt ratio rises, the effects of alternative funding policies become as important as the effects of budget deficits. Managing debt inefficiently may seriously undermine any fiscal stabilization effort. Consider how dramatic the consequences of the 1992 EMS crisis would have been, had European debts been denominated in Deutsche Marks. Think of the budget impact of an unexpected rise in interest rates when the debt is greater than GDP and a large share of it is in short maturities or indexed to interest rates, as is the case in a number of OECD countries.

Faced with the problem of how to manage the public debt, policymakers turn to economic theory for guidance in the choice of debt instruments. Not surprisingly, academic interest in debt management has been revived. In recent years an increasing number of papers have dealt with the economics of debt management. Notwithstanding the many contributions, a general framework to contrast alternative strategies of debt management on welfare grounds has not yet emerged. Prescriptions for policymaking available in the literature are either hard to interpret or very specific.

The book aims at providing a theoretical framework that policymakers could use as a guide to debt management. The analysis focuses on policy issues and takes the perspective of cost and risk minimization that is familiar to policymakers. The effect of public debt management on financial markets, risk-sharing, policy credibility, interest costs and taxation are all discussed and evaluated within a unified theoretical framework. A large section of the book is devoted to the evidence on the composition and maturity of public debt of OECD countries and to the implications of security market structure for the choice of debt instruments. The analysis emphasizes the trade-offs involved in debt management, and shows how theory can be used to inform practical policy decisions.

The book grew out of a research project started many years ago with my Ph.D. dissertation at MIT; over time I extended this work to new ideas, new theories, new evidence. My first thanks go to Olivier Blanchard who first convinced me to work on debt management. Together we wrote the article on which Sections 6.7 and 6.8 in this book are based. More importantly, he taught me economics and intellectual honesty. I thank Bob Solow for invaluable advice and the friends and colleagues at MIT who shared with me ideas. I am particularly . . .

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