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

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M. Hashem Pesaran ()

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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 GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 346.

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

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Related research
Keywords: Government debt management cost minimisation recursive modelling

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Find related papers by JEL classification:
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  2. Pesaran, M.H. & Timmermann, A., 1990. "A Simple Non-Parametric Test Of Predictive Performance," Papers 29, California Los Angeles - Applied Econometrics.
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  3. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March. [Downloadable!] (restricted)
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  4. M. Hashem Pesaran & Allan Timmermann, 1995. "Predictability of Stock Returns: Robustness and Economic Significance," University of California at San Diego, Economics Working Paper Series 95-19, Department of Economics, UC San Diego.
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  5. 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. [Downloadable!] (restricted)
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  6. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December. [Downloadable!] (restricted)
  7. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January. [Downloadable!] (restricted)
  8. Pesaran, M. Hashem & Potter, Simon M., 1997. "A floor and ceiling model of US output," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 661-695, May. [Downloadable!] (restricted)
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  9. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June. [Downloadable!] (restricted)
  12. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. Pesaran, M. Hashem & Timmermann, Allan G., 1994. "A generalization of the non-parametric Henriksson-Merton test of market timing," Economics Letters, Elsevier, vol. 44(1-2), pages 1-7. [Downloadable!] (restricted)
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  15. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October. [Downloadable!] (restricted)
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  16. Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-91, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Silvia Marchesi, 2006. "Buybacks of domestic debt in public debt management," European Journal of Finance, Taylor and Francis Journals, vol. 12(5), pages 379-400, July. [Downloadable!] (restricted)
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  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. [Downloadable!]
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