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A Stochastic Simulation Framework for the Government of Canada's Debt Strategy

Author

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  • David Jamieson Bolder

Abstract

Debt strategy is defined as the manner in which a government finances an excess of government expenditures over revenues and any maturing debt issued in previous periods. The author gives a thorough qualitative description of the complexities of debt strategy analysis and then demonstrates that it is, in fact, a problem in stochastic optimal control. Although this formal definition is conceptually useful, the author recommends the use of simulation to help characterize the set of strategies that a government can use to fund its borrowing requirements. He then describes in detail a stochastic simulation framework, building from previous work in Bolder (2001, 2002); this framework forms one important element in the debt strategy decision-making process employed by the Government of Canada. The primary objective in constructing this stochastic simulation framework is to learn about the nature of the risk and cost trade-offs associated with different financing strategies. To this end, the paper includes a detailed description of the model; a set of possible debt cost and risk measures, including one potentially useful conditional risk measure; illustrative results under normal stochastic conditions; an analysis of the sensitivity of the results to various key model parameters; a novel approach to stress testing; and a possible framework for selecting a financing strategy, given assumptions about government risk preferences.

Suggested Citation

  • David Jamieson Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
  • Handle: RePEc:bca:bocawp:03-10
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    References listed on IDEAS

    as
    1. Douglas Hostland, "undated". "Monetary Policy and Medium-Term Fiscal Planning," Working Papers-Department of Finance Canada 2001-20, Department of Finance Canada.
    2. Doug Hostland & Chris Matier, "undated". "An examination of alternative Strategies for Reducing Public Debt in the Presence of Uncertainty," Working Papers-Department of Finance Canada 2001-12, Department of Finance Canada.
    3. Derek Hermanutz & Chris Matier, "undated". "Modelling Federal Finances under Uncertainty," Working Papers-Department of Finance Canada 2000-02, Department of Finance Canada.
    4. David Jamieson Bolder, 2001. "Affine Term-Structure Models: Theory and Implementation," Staff Working Papers 01-15, Bank of Canada.
    5. David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
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    Citations

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    Cited by:

    1. Johannes Holler, 2013. "Funding Strategies of Sovereign Debt Management: A Risk Focus," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 51-74.
    2. Massimo BERNASCHI & Alessandro MISSALE & Davide VERGNI, 2009. "Should governments minimize debt service cost and risk? A closer look at the debt strategy. Simulation approach," Departmental Working Papers 2009-53, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    3. Baghdassarian, William & Mele, Gianluca & Pradelli, Juan, 2014. "Assessing public debt sustainability in Mauritania with a stochastic framework," Policy Research Working Paper Series 7088, The World Bank.
    4. Balibek, Emre & Köksalan, Murat, 2010. "A multi-objective multi-period stochastic programming model for public debt management," European Journal of Operational Research, Elsevier, vol. 205(1), pages 205-217, August.
    5. Melecky, Martin, 2012. "Formulation of public debt management strategies: An empirical study of possible drivers," Economic Systems, Elsevier, vol. 36(2), pages 218-234.
    6. Martin Melecky, 2012. "Choosing The Currency Structure Of Foreign‐Currency Debt: A Review Of Policy Approaches," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(2), pages 133-151, March.
    7. Christopher Cameron, 2018. "Visualizing Treasury Issuance Strategy," Papers 1802.03376, arXiv.org, revised Feb 2018.
    8. Hans J Blommestein & Anja Hubig, 2012. "Is the standard micro portfolio approach to sovereign debt management still appropriate?," BIS Papers chapters,in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 141-155 Bank for International Settlements.
    9. Michael G. Papaioannou, 2009. "Exchange Rate Risk Measurement and Management: Issues and Approaches for Public Debt Managers," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 7(1), pages 7-34.
    10. Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.
    11. David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Staff Working Papers 07-13, Bank of Canada.
    12. Michele Manna & Emmanuela Bernardini & Mauro Bufano & Davide Dottori, 2013. "Modelling public debt strategies," Questioni di Economia e Finanza (Occasional Papers) 199, Bank of Italy, Economic Research and International Relations Area.
    13. Farhan Akbar & Thierry Chauveau, 2009. "An Analysis of Exchange Rate Risk Exposure Related to Public Debt Portfolio of Pakistan: Beyond Delta-Normal VAR Approach," SBP Working Paper Series 30, State Bank of Pakistan, Research Department.

    More about this item

    Keywords

    Debt management; Econometric and statistical methods; Economic models;

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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