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Government Debt Management: The Long and the Short of It

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cam.issuedOnline2018-10-17
dc.contributor.authorFaraglia, E
dc.contributor.authorMarcet, Albert
dc.contributor.authorScott, Andrew
dc.contributor.authorOikonomou, Rigas
dc.contributor.orcidFaraglia, Elisa [0000-0003-1755-0618]
dc.date.accessioned2019-01-14T09:38:27Z
dc.date.available2019-01-14T09:38:27Z
dc.date.issued2019
dc.description.abstractStandard 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.
dc.identifier.doi10.17863/CAM.35249
dc.identifier.eissn1467-937X
dc.identifier.issn1467-937X
dc.identifier.urihttps://www.repository.cam.ac.uk/handle/1810/287934
dc.language.isoeng
dc.publisherOUP
dc.publisher.urlhttps://academic.oup.com/restud/advance-article/doi/10.1093/restud/rdy061/5132698
dc.subjectBond repurchases
dc.subjectComputational methods
dc.subjectDebt management
dc.subjectFiscal policy
dc.subjectIncomplete markets
dc.subjectMaturity structure
dc.subjectTax smoothing
dc.titleGovernment Debt Management: The Long and the Short of It
dc.typeArticle
dcterms.dateAccepted2018-10-01
prism.numberrdy061
prism.publicationNameThe Review of Economic Studies
rioxxterms.licenseref.startdate2018-10-01
rioxxterms.licenseref.urihttp://www.rioxx.net/licenses/all-rights-reserved
rioxxterms.typeJournal Article/Review
rioxxterms.versionAM
rioxxterms.versionofrecord10.1093/restud/rdy061

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