Union Debt Management

Juan Equiza-Goñi, Elisa Faraglia and Rigas Oikonomou

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We study the role of government debt maturity in currency unions to identify whether debt management can help governments to hedge their budgets against spending shocks. We first use a detailed dataset of debt portfolios of five Euro Area countries to run a battery of VARs, estimating the responses of holding period returns to fiscal shocks. We find that government portfolios, which in our sample comprise mainly of nominal assets, have not been effective in absorbing idiosyncratic fiscal risks, whereas they have been very effective in absorbing aggregate risks. We then setup a formal model of optimal debt management with two countries, distortionary taxes and aggregate and idiosyncratic shocks. The theoretical model concludes that nominal bonds are not optimal to insure against idiosyncratic fiscal shocks in a currency area. In contrast, we find that long term inflation indexed debt allows governments to take full advantage of fiscal hedging.

Keywords: Debt Management; Fiscal Policy; Government Debt; Maturity Structure; Tax Smoothing (search for similar items in EconPapers)
JEL-codes: E43 E62 H63 (search for similar items in EconPapers)
Date: 2018-07-01
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-pbe
Note: ef307
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https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1890.pdf

Related works:
Journal Article: Union debt management (2023)
Working Paper: Union Debt Management (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1890

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