A Stochastic Simulation Framework for the Government of Canada's Debt Strategy

David Bolder

Staff Working Papers from Bank of Canada

Abstract: Debt strategy is defined as the manner in which a government finances an excess of government expenditures over revenues and any maturing debt issued in previous periods. The author gives a thorough qualitative description of the complexities of debt strategy analysis and then demonstrates that it is, in fact, a problem in stochastic optimal control. Although this formal definition is conceptually useful, the author recommends the use of simulation to help characterize the set of strategies that a government can use to fund its borrowing requirements. He then describes in detail a stochastic simulation framework, building from previous work in Bolder (2001, 2002); this framework forms one important element in the debt strategy decision-making process employed by the Government of Canada. The primary objective in constructing this stochastic simulation framework is to learn about the nature of the risk and cost trade-offs associated with different financing strategies. To this end, the paper includes a detailed description of the model; a set of possible debt cost and risk measures, including one potentially useful conditional risk measure; illustrative results under normal stochastic conditions; an analysis of the sensitivity of the results to various key model parameters; a novel approach to stress testing; and a possible framework for selecting a financing strategy, given assumptions about government risk preferences.

Keywords: Debt management; Econometric and statistical methods; Economic models (search for similar items in EconPapers)
JEL-codes: C0 C15 C52 H63 (search for similar items in EconPapers)
Pages: 109 pages
Date: 2003
New Economics Papers: this item is included in nep-cmp
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Citations: View citations in EconPapers (22)

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