How is the Debt Managed? Learning from Fiscal Stabilizations

Abstract

This paper examines public debt management during episodes of fiscal stabilization when long-term interest rates are generally higher than governments' expectations of future rates. 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. This evidence suggests that governments tend to prefer long to short maturity debt because they are concerned about refinancing risk. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.