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The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach

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  • M. Hashem Pesaran

Abstract

This paper presents an empirical analysis of the efficiency of the UK debt management authorities's (DMA) behaviour from a cost minimisation perspective over the period January 1985 to March 1995. During this period, the maturity structure of the government's bond portfolio was subject to frequent finetuning, aimed principally at lowering interest costs. We examine the efficiency of the DMA's behaviour from a cost minimisation perspective. Using a bi-variate version of the recursive modelling procedure applied to forecasting stock returns by Pesaran and Timmermann (1995, 2000), we show that bond returns are forecastable but the predictive power of macroeconomic variables is time dependent. We simulate the impact of adjusting the bond portfolio in response to our forecasts. The simulated average interest costs are lower than those resulting from the DMA's actual real-time behaviour. However, a substantial reduction in interest costs requires large monthly changes in the portfolio's maturity structure.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 346.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_346

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Keywords: Government debt management; cost minimisation; recursive modelling;

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References

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  1. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  2. Pesaran, M.H. & Timmermann, A.G., 1992. "A Generalisation of the Non-Parametric Henriksson-Merton Test of Market Timing," Cambridge Working Papers in Economics 9218, Faculty of Economics, University of Cambridge.
  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  4. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  5. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  6. Pesaran, H.M. & Potter, S.M., 1995. "A Floor and Ceiling Model of U.S. Output," Cambridge Working Papers in Economics 9407, Faculty of Economics, University of Cambridge.
  7. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  8. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
  9. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
  10. Allan Timmermann & M. Hashem Pesaran, 1999. "A Recursive Modelling Approach to Predicting UK Stock Returns," FMG Discussion Papers dp322, Financial Markets Group.
  11. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis.
  12. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
  13. Sullivan, Ryan & Timmermann, Allan G & White, Halbert, 1998. "Data-Snooping, Technical Trading Rule Performance and the Bootstrap," CEPR Discussion Papers 1976, C.E.P.R. Discussion Papers.
  14. Calvo, Guillermo A & Guidotti, Pablo E, 1992. "Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 895-919, November.
  15. Pesaran, M.H. & Timmermann, A., 1990. "A Simple Non-Parametric Test Of Predictive Performance," Papers 29, California Los Angeles - Applied Econometrics.
  16. Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-28, September.
  17. Boothe, Paul & Reid, Bradford, 1992. "Debt Management Objectives for a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 43-60, February.
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Cited by:
  1. Marchesi, S., 2000. "Buybacks of Domestic Debt in Public Debt Management," The Warwick Economics Research Paper Series (TWERPS) 573, University of Warwick, Department of Economics.
  2. Coe, P. & Vahey S.P. & Wakerly, E.C., 2000. "The Transparency and Accountability of UK Debt Management: A Proposal," Cambridge Working Papers in Economics 0028, Faculty of Economics, University of Cambridge.

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