A Modest Proposal for Structuring Public Debt

Abstract

This paper proposes structuring public debt using considerations of robustness rather than strict optimality. Our proposal minimizes, over the infinite future, the conditional uncertainty surrounding public financing requirements. We estimate holding-period returns and market values on nominal and indexed UK government debt for a range of maturities, and derive the desired debt structures, according our proposal, that would be implied by the historical data. Although implications are not precise in all directions, given the historical UK data, our proposal leads to the government strongly favoring index-linked debt over conventionals.

JEL Classification: E44, E58, E62