This Paper provides evidence on the behaviour of public debt managers during fiscal stabilizations. Such episodes provide valuable information on the way debt instruments are chosen because they allow the problem of policymakers' expectations of interest rates not generally being observable to be overcome. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency, causing the conditional volatility of short-term interest rates to become higher, long-term interest rates to become lower, and the fall in long-term rates, that follows the announcement of the stabilization program, to become stronger. In contrast, conventional measures of the relative cost of issuing long-term debt, such as the long-short interest-rate spread, are not significant. This evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned with the risk of refinancing at higher than expected interest rates. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2655.
Find related papers by JEL classification: 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 H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
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