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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. Alessandro Prati & Francesco Drudi, 1999. "Signaling Fiscal Regime Sustainability," IMF Working Papers 99/86, International Monetary Fund.
  2. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
  3. 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.
  4. Cohen, Daniel & Verdier, Thierry, 1995. "'Secret' buy-backs of LDC debt," Journal of International Economics, Elsevier, vol. 39(3-4), pages 317-334, November.
  5. Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
  6. Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers.
  7. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  8. Rotemberg, Julio J., 1991. "Sovereign debt buybacks can lower bargaining costs," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 330-348, September.
  9. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
  10. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  11. M. Hashem Pesaran, 2000. "The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach," CESifo Working Paper Series 346, CESifo Group Munich.
  12. Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, March.
  13. Dani Rodrik, 1988. "Promises, Promises: Credible Policy Reform via Signaling," NBER Working Papers 2600, National Bureau of Economic Research, Inc.
  14. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-19, March.
  15. Bulow, Jeremy & Rogoff, Kenneth, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1219-35, November.
  16. 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.
  17. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
  18. Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers 454, C.E.P.R. Discussion Papers.
  19. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
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