This paper considers public debt management as a component of a more general problem involving fiscal planning under uncertainty. This approach has the potential to result in a new optimal debt maturity structure. Using a stochastic simulation macro-econometric model, we show that a shorter debt maturity structure is generally less expensive and may also contribute to stabilize the budget balance as interest rates tend to decline when the economy is weak.
Get full access to this article
View all access options for this article.
References
1.
AgellJ.PerssonM. and FriedmanB.1992. Does Debt Management Policy Matter? Oxford: Oxford University Press.
2.
AngA. and PiazzesiM.2001. “A no-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables.” NBER Working Paper.No. 8363.
3.
BolderD.2002. “The Government of Canada's Debt Strategy Simulation Framework.” Discussion paper, Bank of Canada.
4.
CampbellJ.1995. “Some Lessons from the Yield Curve.” Journal of Economic Perspectives. Vol. 9, No. 3, pp. 129–152.
5.
CampbellJ. and ShillerR.1991. “Yield Spreads and Interest Rate Movements: a Bird's Eye View.” Review of Economic Studies. 58, pp. 495–514.
6.
ClarkP.K.1987. “The Cyclical Component of U.S. Economic Activity.” Quarterly Journal of Economics. Vol. 102, No. 4, pp. 797–814.
7.
CopelandT. and WestonF.1992. Financial Theory and Corporate Policy. Reading, Massachusetts: Addi-son-Wesley Publishing Company.
8.
CoxJ.IngersollJ. and RossS.1985. “A Theory of the Term Structure of Interest Rates.” Econometrica. Vol. 53, No. 2, pp. 385–407.
GeorgesP. and MoreauN.2002. “Enrichments to Fiscal Commitments in the Presence of Uncertainty.” Department of Finance-Canada Working Paper Series. No. 2002–11.
12.
GeorgesP. 2003a. “Borrowing Short- or Long-Term – Does the Government Really Face a Trade-off?” Department of Finance-Canada Working Paper Series. No. 2003–16.
13.
GeorgesP. 2003b. “The Vasicek and CIR Models and the Expectation Hypothesis of the Term Structure.” Department of Finance-Canada Working Paper Series. No. 2003–17.
14.
HermanutzD. and PoitrasF.2001. “The Fiscal Impact of a Debt Maturity Structure.” Department of Finance-Canada, mimeo.
15.
HostlandD.2001. “Specification of a Stochastic Simulation Model for the Analysis of Monetary and Fiscal Policy.” Department of Finance-Canada Working Paper Series. No. 2001–14.
16.
MissaleA.2001. “Optimal Debt Management with a Stability and Growth Pact.” Public Finance and Management, 11, pp. 58–91.
17.
OECD, 2002. “Report on Interest-Rate Risk Management of Government Debt.” Prepared by Ad hoc Working Group on Interest-Rate Risk Management of Government Debt.
18.
VasicekO.1977. “An Equilibrium Characterization of the Term Structure.” Journal of Financial Economics. 5, pp. 177–188.
