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Frequency-domain analysis of debt service in a macro-finance model for the euro area

Jean-Paul Renne

Working papers from Banque de France

Abstract: This paper illustrates how a parsimonious macro-finance model can be exploited to investigate the frequency-domain properties of debt service implied by various financing srategies. This orginal approach is valuable to public debt managers seeking to assess the fiscal-hedging properties of the financing strategies they implement. The model, inspired by Rudebusch and Wu (2008), is estimated on euro-area data over the period 1999-2009. At business-cycle frequencies, the variance of interest payments is lower when nominal long-term bonds are issued. From a budget-smoothing perspective, debt service variability plays a major role, but pro- or counter-cyclicality of debt service also matters. In this respect, the results suggest that while interest payments associated with medium- to long-term nominal bonds are negatively correlated with real activity, those associated with inflation-linked bonds and short-term nominal bonds tend to be pro-cyclical.

Keywords: Macro-finance model; spectral analysis; term-structure of interest rates; public debt management (search for similar items in EconPapers)
JEL-codes: C51 E32 E43 G12 H63 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:261

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