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Managing the Public Debt: The Optimal Taxation Approach

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  • Missale, Alessandro

Abstract

This paper examines research on public debt management, focusing on debt structure by denomination, indexation features, and maturity. The optimal taxation approach is reviewed and its policy implications are related to the trade-off between minimization of the expected cost of debt servicing and minimization of budgetary risk. Strong arguments are provided for debt instruments which yield low returns when output and hence revenues are lower and public spending higher than expected. This debt design minimizes tax distortions and provides flexibility in conducting fiscal policy. The exact characterization of the debt composition which supports efficient taxation depends on the stochastic structure of the economy. Long-term nominal debt is a hedge against supply shocks affecting revenues and inflation and makes the government budget insensitive to interest-rate risk. However, at high levels of debt, the extent of insurance or flexibility that governments can obtain by issuing long-term nominal debt is limited by the need to maintain the credibility of the anti-inflation stance. Copyright 1997 by Blackwell Publishers Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 11 (1997)
Issue (Month): 3 (September)
Pages: 235-65

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Handle: RePEc:bla:jecsur:v:11:y:1997:i:3:p:235-65

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Cited by:
  1. Goldfajn, Ilan & Silveira, Marcos Antonio, 2002. "Should government smooth exchange rate risk?," Journal of Development Economics, Elsevier, vol. 69(2), pages 393-421, December.
  2. Ilan Goldfajn & Marcos Antonio Silveira, 2002. "Should government smooth exchange rate risk?," Textos para discussão 465, Department of Economics PUC-Rio (Brazil).
  3. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176 Bank for International Settlements.
  4. Wilson Au-Yeung & Jason McDonald & Amanda Sayegh, 2006. "Australian Government Balance Sheet Management," NBER Working Papers 12302, National Bureau of Economic Research, Inc.
  5. Nick Davis, 2001. "Does Crown Financial Portfolio Composition Matter?," Treasury Working Paper Series 01/34, New Zealand Treasury.
  6. Kannan, R & Singh, Bhupal, 2007. "Debt-deficit dynamics in India and macroeconomic effects: A structural approach," MPRA Paper 16480, University Library of Munich, Germany, revised 2007.
  7. Fausto Hernández Trillo & Alejandro Villagómez Amezcua, 2000. "La estructura de la deuda pública en México: Lecciones y perspectivas," IDB Publications 7612, Inter-American Development Bank.
  8. Santiago Herrera & Ferhan Salman, 2008. "Tangos, Sambas or Belly Dancing? Or, do Spreads Dance to the Same Rhythm? Signaling Regime Sustainability in Argentina, Brazil and Turkey," Working Papers 0807, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  9. Claeys, Peter & Moreno, Rosina & Suriñach, Jordi, 2012. "Debt, interest rates, and integration of financial markets," Economic Modelling, Elsevier, vol. 29(1), pages 48-59.
  10. Alessandro MISSALE & Emanuele BACCHIOCCHI, 2005. "Managing debt stability," Departmental Working Papers 2005-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  11. Johannes Holler, 2013. "Funding Strategies of Sovereign Debt Management: A Risk Focus," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 51–74.
  12. Hans J. Blommestein & Anja Hubig, 2012. "A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management," OECD Working Papers on Sovereign Borrowing and Public Debt Management 4, OECD Publishing.
  13. Eric Hansen, 2003. "Objectives, Targets and Instruments for Crown Financial Policy," Treasury Working Paper Series 03/21, New Zealand Treasury.
  14. Gerardo M Licandro, 2001. "Monetary Policy Coordination, Monetary Integration and other essays," Levine's Working Paper Archive 625018000000000172, David K. Levine.
  15. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42, January.
  16. Udaibir S. Das & Yinqiu Lu & Michael G Papaioannou & Iva Petrova, 2012. "Sovereign Risk and Asset and Liability Management," IMF Working Papers 12/241, International Monetary Fund.
  17. Ilan Goldfajn & Marcos Antonio Silveira, 2002. "Should Government Smooth Exchange Rate Risk?," Working Papers Series 48, Central Bank of Brazil, Research Department.
  18. Togo, Eriko, 2007. "Coordinating public debt management with fiscal and monetary policies : an analytical framework," Policy Research Working Paper Series 4369, The World Bank.
  19. Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.

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