Public debt management became a key policy issue for a number of highly indebted industrialized countries in the late 1970s and early 1980s, when public debt accumulation accelerated significantly following the emergence of primary fiscal imbalances, the large increase in real interest rates and the concurrent slowdown in economic growth. Although some of the high debt countries, such as Ireland and Denmark, have succeeded in reversing the increasing trend of the debt-to-GDP ratio, the burden of public debt remains significant today in several economies. In 1993, for example, debt-to-GDP ratios exceeded 100 per cent in Belgium, Greece and Italy; in the same countries, interest payments on public debt exceeded 10 per cent of GDP.
In the theoretical literature, after the seminal paper by Tobin (1963), debt management was largely ignored for over two decades. 2 The increasing importance of debt burdens spurred a surge of interest in public debt management over the last 10 years. Papers by Lucas and Stokey (1983), Bohn (1988), Calvo (1988), Calvo and Guidotti (1990) and others have emphasized issues such as the hedging role of different government debt instruments; the link between the currency denomination and maturity of the public debt and the incentive to erode its value by inflation; the relation between debt management and the likelihood of runs on government debt; and the optimal structure of debt maturity. Empirical work, however, remains scarce. One of the main reasons being the difficulty of collecting data on public debt that are comparable across countries.
Why should public debt management matter? The so-called Barro debt neutrality theorem (Barro, 1974) demonstrates the irrelevance of the path of public debt and taxes under a series of restrictive assumptions: complete