Government Debt Management: The Long and the Short of It
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Publication Date
2019-11-01Journal Title
The Review of Economic Studies
ISSN
1467-937X
Publisher
OUP
Number
rdy061
Type
Article
This Version
AM
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Faraglia, E., Marcet, A., Scott, A., & Oikonomou, R. (2019). Government Debt Management: The Long and the Short of It. The Review of Economic Studies, (rdy061) https://doi.org/10.1093/restud/rdy061
Abstract
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 US 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 paper is introducing a novel computational method to find global solutions.
Identifiers
External DOI: https://doi.org/10.1093/restud/rdy061
This record's URL: https://www.repository.cam.ac.uk/handle/1810/287934
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