A Theory of Public Debt Management with Unobservable Demand

Graziella Bertocchi ()

Economic Journal, 1993, vol. 103, issue 419, 960-74

Abstract: We study a model of public debt management where government bonds are placed through 'subscription issues' and the demand for bonds is not directly observed by the authority. The debt manager selects an optimal pricing policy which maximizes profits subject to an intertemporal budget constraint. The rations produced by the discrepancies between estimated and actual demand reveal valuable information about unobservable market conditions. By applying results from the theory of 'active learning' we show how the price adjustment process reaches a steady state. However, it may not converge to the full-information price associated with complete learning. In the long run, rations are zero on average. Copyright 1993 by Royal Economic Society.

Date: 1993
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