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Don’t look back in anger: The use of derivatives in public debt management in Italy

Author

Listed:
  • Mauro Bucci

    (Banca d'Italia)

  • Ilaria De Angelis

    (Banca d'Italia)

  • Emilio Vadalà

    (Banca d’Italia)

Abstract

Over the last few years, the use of financial derivatives by governments has been actively debated, especially regarding countries with a high public debt, occasioning concern among investors regarding the actual extent of the phenomenon. The risk profile and costs related to these contracts are usually quite different from those of ordinary debt instruments; moreover, the high degree of flexibility they enjoy allows them to be used for risk hedging as well as for reducing the cost of debt in the short term, although this does increase the volatility of the public finances in the medium-to-long term. The impact of the derivatives portfolio on the Italian public accounts is the result of decisions taken in the (at times remote) past, and of market developments, which have proven very different from those originally envisaged. The paper provides a comprehensive and up-to-date overview of the use of derivative financial instruments for the management of Italian public debt, analysing the strategies pursued by the government and their impact on the public finances, also in comparison with other European countries. In recent years, more stringent statistical regulations in the EU have been introduced while levels of transparency (of the strategies, size and features of the derivatives portfolio) have improved and risks for the public finances have diminished.

Suggested Citation

  • Mauro Bucci & Ilaria De Angelis & Emilio Vadalà, 2020. "Don’t look back in anger: The use of derivatives in public debt management in Italy," Questioni di Economia e Finanza (Occasional Papers) 550, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_550_20
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2020-0550/QEF_550_20.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fabrizio Casalin & Floriana Cerniglia & Enzo Dia, 2021. "Stock-flow adjustments and interest costs in public debt dynamics," CRANEC - Working Papers del Centro di Ricerche in Analisi economica e sviluppo economico internazionale crn2102, Università Cattolica del Sacro Cuore, Centro di Ricerche in Analisi economica e sviluppo economico internazionale (CRANEC).

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    More about this item

    Keywords

    derivatives; public finance; public debt;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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