Public Debt Sustainability and Management in a Compound Option Framework

Jorge Chan-Lau and Andre Santos

No 2010/002, IMF Working Papers from International Monetary Fund

Abstract: This paper introduces the Asset and Liability Management (ALM) compound option model. The model builds on the observation that the public sector net worth in a multi-period setting corresponds to the value of an option on an option on total government assets. Hence, the ALM compound option model is better suited for analyzing and evaluating the risk profile of public debt than existing one-period models, and is especially useful for analyzing the soundness of exit strategies from the large fiscal expansions undertaken by G-20 countries in the wake of the recent financial crisis. As an illustration, the model is used to analyze the risk profile and sustainability of Australia's public debt under different policies.

Keywords: WP; market value; interest rate; fiscal policy; Asset-liability management; debt management; default risk; Australia; debt payment; option model; debt profile; debt issuer; market price; debt manager; maturity profile; government debt guarantee; fair value; debt maturity profile; Government securities; Government debt management; Financial statements (search for similar items in EconPapers)
Pages: 30
Date: 2010-01-01
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Citations: View citations in EconPapers (4)

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