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Public debt management announcements: A welfare-theoretic analysis

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  • Dentler, Alexander
  • Rossi, Enzo

Abstract

Before an auction, public debt managers (DMs) announce the number of bonds to be sold to primary dealers (PDs); however, the empirical evidence suggests that when “beat-the-market” opportunities arise, more bonds than announced are auctioned. A micro foundation for this result resides in PDs’ sale of bonds to uninformed traders, thereby extracting information rents. These rents give rise to two counteracting effects. On the one hand, they create an auction premium that motivates DMs to overissue. On the other hand, they motivate traders to learn the bond value, which increases market expertise, mitigating the auction premium and issuance bias. A credible announcement policy raises welfare by increasing the auction premium, depressing the issuance bias, and reducing traders’ need to invest in market expertise.

Suggested Citation

  • Dentler, Alexander & Rossi, Enzo, 2024. "Public debt management announcements: A welfare-theoretic analysis," Economic Modelling, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:ecmode:v:131:y:2024:i:c:s0264999323003735
    DOI: 10.1016/j.econmod.2023.106561
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    More about this item

    Keywords

    Public debt management; Announcements; Sovereign debt markets; Treasury auctions; State-inconsistent policy; Market expertise;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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