Government Debt Management: The Long and the Short of It (Plus Appendix)

Andrew Scott, Elisa Faraglia, Rigas Oikonomou and Albert Marcet

No 799, Working Papers from Barcelona School of Economics

Abstract: Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue ( r/r ) new ones. These features of DM are inconsistent with US data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this paper is introducing a novel computational method to find global solutions.

Keywords: Debt Management; Tax smoothing; incomplete markets; fiscal policy; maturity structure; bond repurchases; computational methods (search for similar items in EconPapers)
JEL-codes: C63 E43 E62 H63 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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