How is the Debt Managed? Learning from Fiscal Stabilizations

IGIER Working Paper No. 174

26 Pages Posted: 13 Dec 2000

See all articles by Alessandro Missale

Alessandro Missale

University of Milan - Department of Business Policy and Economics

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Pierpaolo Benigno

University of Bern - Department of Economics; Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

Abstract

This paper provides evidence on the behavior of public debt managers during fiscal stabilizations. Such episodes provide valuable information on the way debt instruments are chosen because they allow to overcome the problem that policymakers' expectations of interest rates are generally not observable. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency the higher is the conditional volatility of short-term interest rates, the lower are long-term interest rates, and the stronger is the fall in long-term rates that follows the announcement of the stabilization program. By contrast, conventional measures of the relative cost of issuing long-term debt, such as the long-short interest-rate spread, are not significant. This evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned about the risk of refinancing at higher than expected interest rates. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.

Keywords: Credibility, Debt Maturity, Public Debt Management, Stabilization

JEL Classification: E63, H63

Suggested Citation

Missale, Alessandro and Giavazzi, Francesco and Giavazzi, Francesco and Benigno, Pierpaolo, How is the Debt Managed? Learning from Fiscal Stabilizations (September 2000). IGIER Working Paper No. 174, Available at SSRN: https://ssrn.com/abstract=248114 or http://dx.doi.org/10.2139/ssrn.248114

Alessandro Missale

University of Milan - Department of Business Policy and Economics ( email )

Via Conservatorio 7
I-20122 Milano
Italy

Francesco Giavazzi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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Milan, 20136
Italy
+39 02 5836 3304 (Phone)
+39 02 5836 3302 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pierpaolo Benigno (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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