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Denomination of the Debt of the Chilean Government: A Risk Management Perspective

  • Elías Albagli I.
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    This paper proposes a framework to assess the convenience of the current public debt denomination of the Chilean Government, through its implications on fiscal budget risk management. A “Value at Risk” methodology is proposed to compare alternative denominations regarding currency and interest rate. This methodology computes the implicit volatility of the budget’s result considering both the variance of individual accounts, as well as their respective covariance, and permits to compare quantitatively the relative risk of different debt denominations. The exercise suggests that changing the current debt denomination in fixed interest payments to variable payments indexed to Libor or government bond rates would significantly reduce the volatility of fiscal results. If more recent correlations are considered in the exercise, the results also suggest reducing current currency denomination in US dollars towards a stronger position in euros. An additional analysis that considers the volatility of estimated correlations, however, recommends taking previous conclusions with caution.

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    Article provided by Central Bank of Chile in its journal Economía Chilena.

    Volume (Year): 8 (2005)
    Issue (Month): 3 (December)
    Pages: 55-74

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    Handle: RePEc:chb:bcchec:v:8:y:2005:i:3:p:55-74
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    1. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    2. Raphael Bergoeing & Raimundo Soto, 2002. "Testing Real Business Cycles Models in an Emerging Economy," Working Papers Central Bank of Chile 159, Central Bank of Chile.
    3. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile.
    4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    5. David M Kreps & Evan L Porteus, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Levine's Working Paper Archive 625018000000000009, David K. Levine.
    6. César Calderón M. & Francisco Gallego Y., 2002. "La Tasa de Interés Real Neutral en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(2), pages 65-72.
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