Government Debt Management: the Long and the Short of It

• Elisa Faraglia ^[1] ; Albert Marcet ^[2] ; Rigas Oikonomou ^[3] ; Andrew Scott ^[4]
  1. [1] University of Cambridge

     University of Cambridge

     Cambridge District, Reino Unido

     
  2. [2] University College London

     University College London

     Reino Unido

     
  3. [3] Université Catholique de Louvain

     Université Catholique de Louvain

     Arrondissement de Nivelles, Bélgica

     
  4. [4] London Business School

     London Business School

     Reino Unido

     

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• Localización: Review of economic studies, ISSN 0034-6527, Vol. 86, Nº 6, 2019, págs. 2554-2604
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue (r/r) new ones. These features of DM are inconsistent with U.S. data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively, long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions.