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Modelling public debt strategies

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  • Michele Manna

    ()
    (Bank of Italy)

  • Emmanuela Bernardini

    ()
    (Bank of Italy)

  • Mauro Bufano

    ()
    (Bank of Italy)

  • Davide Dottori

    ()
    (Bank of Italy)

Abstract

This paper puts forward a comprehensive framework to model medium-to-long term public debt refinancing strategies. Essentially the framework has two main building blocks. First, a large number of strategies are generated so as to determine a wide range of potential financing plans, regardless of whether they look conventional (close to current actual choices) or odd, provided they meet the Treasury’s financing needs and legal constraints. Second, the performance of these viable strategies is measured in terms of current and future costs as well as various types of risk. As an add-on, through a panel model the framework accounts for the premium over current market rates that investors may demand in order to subscribe unusually large issues by the Treasury. All in all, this framework yields a frontier of efficient cost-risk outcomes. Moreover, it assesses how strategies perform when the interest rate forecasts relied on turn out to be wrong. Finally, it encompasses both a long-term perspective in debt management and a more tactical approach, allowing for time variant choices.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 199.

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Date of creation: Sep 2013
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Handle: RePEc:bdi:opques:qef_199_13

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Keywords: refinancing strategy; public debt; government auctions;

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  1. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
  2. Peter Exterkate & Dick Van Dijk & Christiaan Heij & Patrick J. F. Groenen, 2013. "Forecasting the Yield Curve in a Data‐Rich Environment Using the Factor‐Augmented Nelson–Siegel Model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(3), pages 193-214, 04.
  3. David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Working Papers 06-48, Bank of Canada.
  4. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
  5. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  6. Emanuele Bacchiocchi & Alessandro Missale, 2005. "Managing Debt Stability," CESifo Working Paper Series 1388, CESifo Group Munich.
  7. David Jamieson Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Working Papers 03-10, Bank of Canada.
  8. Berardi, Andrea, 1995. "Estimating the Cox, ingersoll and Ross model of the term structure: a multivariate approach," Ricerche Economiche, Elsevier, vol. 49(1), pages 51-74, March.
  9. Alessandro Missale, . "Optimal Debt Management with a Stability and Growth Pact," Working Papers 166, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  10. Robert J. Barro, 1999. "Notes on Optimal Debt Management," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 281-289, November.
  11. Massimo Bernaschi & Maya Briani & Marco Papi & Davide Vergni, 2007. "Scenario-generation methods for an optimal public debt strategy," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 217-229.
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