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Buybacks of domestic debt in public debt management

  • Silvia Marchesi

This paper shows how public debt repurchases can be used to reduce the costs of debt service under the hypothesis that the government could be of two types and that there is asymmetric information between the government and the private sector. For example, at the beginning of a fiscal stabilization a government typically does not enjoy full credibility among investors and high interest rates on longterm bonds may reflect credibility problem rather than term premia. In a two-period framework, this paper suggests that buybacks could be used to reduce the risk premia since they can signal government commitment to a previously-announced policy.

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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 12 (2006)
Issue (Month): 5 ()
Pages: 379-400

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Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:379-400
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  1. Coe, P. & Pesaran, M.H. & Vahey, S.P., 2000. "The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach," Cambridge Working Papers in Economics 0005, Faculty of Economics, University of Cambridge.
  2. Allan Drazen & Paul R. Masson, 1993. "Credibility of Policies versus Credibility of Policymakers," NBER Working Papers 4448, National Bureau of Economic Research, Inc.
  3. Cohen, D. & Verdier, T., 1991. "Secret "Buybacks" of LDC Debt," DELTA Working Papers 91-18, DELTA (Ecole normale supérieure).
  4. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
  5. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  6. Alesina, Alberto F & Prati, Alessandro & Tabellini, Guido, 1989. "Public Confidence and Debt Management: A Model and a Case Study of Italy," CEPR Discussion Papers 351, C.E.P.R. Discussion Papers.
  7. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
  8. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  9. Alessandro Missale & Francesco Giavazzi & Pierpaolo Benigno, 1997. "Managing the Public Debt in Fiscal Stabilizations: The Evidence," NBER Working Papers 6311, National Bureau of Economic Research, Inc.
  10. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  11. Drudi, F. & Prati, A., 1998. "Signaling Fiscal Regime Sustainability," Papers 335, Banca Italia - Servizio di Studi.
  12. repec:tpr:qjecon:v:106:y:1991:i:3:p:837-50 is not listed on IDEAS
  13. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
  14. Acharya, Sankarshan & Diwan, Ishac, 1993. "Debt Buybacks Signal Sovereign Countries' Creditworthiness: Theory and Tests," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 795-817, November.
  15. Julio J. Rotemberg, 1988. "Sovereign Debt Buybacks Can Lower Bargaining Costs," NBER Working Papers 2767, National Bureau of Economic Research, Inc.
  16. Rodrik, Dani, 1989. "Promises, Promises: Credible Policy Reform via Signalling," Economic Journal, Royal Economic Society, vol. 99(397), pages 756-72, September.
  17. repec:tpr:qjecon:v:106:y:1991:i:4:p:1219-35 is not listed on IDEAS
  18. Kenneth A. Froot, 1988. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," NBER Working Papers 2675, National Bureau of Economic Research, Inc.
  19. Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers 454, C.E.P.R. Discussion Papers.
  20. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, July.
  21. Jeremy Bulow & Kenneth Rogoff, 1989. "Sovereign Debt Repurchases: No Cure for Overhang," NBER Working Papers 2850, National Bureau of Economic Research, Inc.
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