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A Stochastic Simulation Framework for the Government of Canada's Debt Strategy

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  • David Jamieson Bolder

Abstract

Debt strategy is defined as the manner in which a government finances an excess of government expenditures over revenues and any maturing debt issued in previous periods. The author gives a thorough qualitative description of the complexities of debt strategy analysis and then demonstrates that it is, in fact, a problem in stochastic optimal control. Although this formal definition is conceptually useful, the author recommends the use of simulation to help characterize the set of strategies that a government can use to fund its borrowing requirements. He then describes in detail a stochastic simulation framework, building from previous work in Bolder (2001, 2002); this framework forms one important element in the debt strategy decision-making process employed by the Government of Canada. The primary objective in constructing this stochastic simulation framework is to learn about the nature of the risk and cost trade-offs associated with different financing strategies. To this end, the paper includes a detailed description of the model; a set of possible debt cost and risk measures, including one potentially useful conditional risk measure; illustrative results under normal stochastic conditions; an analysis of the sensitivity of the results to various key model parameters; a novel approach to stress testing; and a possible framework for selecting a financing strategy, given assumptions about government risk preferences.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 03-10.

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Length: 109 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:bca:bocawp:03-10

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Related research

Keywords: Debt management; Econometric and statistical methods; Economic models;

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Cited by:
  1. David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Working Papers 07-13, Bank of Canada.
  2. Hans J Blommestein & Anja Hubig, 2012. "Is the standard micro portfolio approach to sovereign debt management still appropriate?," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 141-155 Bank for International Settlements.
  3. 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.
  4. Melecky, Martin, 2010. "Choosing the Currency Structure of Foreign-currency Debt: a Review of Policy Approaches," MPRA Paper 21268, University Library of Munich, Germany.
  5. Michele Manna & Emmanuela Bernardini & Mauro Bufano & Davide Dottori, 2013. "Modelling public debt strategies," Questioni di Economia e Finanza (Occasional Papers) 199, Bank of Italy, Economic Research and International Relations Area.
  6. 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.

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