In search of a theory of debt management

Elisa Faraglia, Albert Marcet and Andrew Scott

Journal of Monetary Economics, 2010, vol. 57, issue 7, 821-836

Abstract: The complete market approach to government debt management argues that a portfolio of non-contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits. However, this approach recommends huge fluctuations in positions, enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications. These extreme, volatile and unstable features are undesirable for two reasons. Firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model. Secondly for even miniscule transaction costs, governments prefer a balanced budget rather than the large positions complete markets recommends. The complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness, e.g. transaction costs, liquidity effects, robustness, etc. and which need to be explicitly incorporated into the portfolio problem.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-3932(10)00095-4
Full text for ScienceDirect subscribers only

Related works:
Working Paper: In Search of a Theory of Debt Management (2015)
Working Paper: In Search of a Theory of Debt Management (2011)
Working Paper: In search of a theory of debt management (2011)
Working Paper: In Search of a Theory of Debt Management (2008)
Working Paper: In Search of a Theory of Debt Management (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:57:y:2010:i:7:p:821-836

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().