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Title:Managing debt stability PDF Logo
Authors:Bacchiocchi, Emanuele
Missale, Alessandro
Issue Date:2005
Series/Report no.:CESifo working papers 1388
Abstract:This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sustainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternative debt instruments on the cost of missing the stabilization target. The optimal debt structure is a function of the expected return differentials between debt instruments, of the conditional variance of their returns and of the conditional covariances of their returns with output growth and inflation. We then explore how the relevant covariances and thus the optimal choice of debt instruments depend on the monetary regime and on Central Bank preferences for output stabilization, inflation control and interestrate smoothing. Finally, we estimate the composition of public debt that would have supported debt stabilization in OECD countries over the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it should be indexed to the price level.
Subjects:debt management
debt structure
debt stabilization
inflation indexation
interest rates
JEL:H63
E63
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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