Government debt management: the long and the short of it

Faraglia, E, Marcet, A, Oikonomou, R and Scott, A (2018) Government debt management: the long and the short of it. The Review of Economic Studies. ISSN 0034-6527 (In Press)

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.

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Item Type: Article
Subject Areas: Economics
Additional Information: © 2018 Review of Economic Studies Ltd / Oxford University Press. This is a pre-copyedited, author-produced version of an article accepted for (forthcoming) publication in The Review of Economic Studies following peer review.
Subjects: B > Bonds
D > Debts
Date Deposited: 12 Sep 2018 09:36
Last Modified: 14 Jul 2019 15:41
URI: http://lbsresearch.london.edu/id/eprint/1007
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