A Stochastic Simulation Framework for the Government of Canada's Debt Strategy
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.
|Date of creation:||2003|
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References listed on IDEAS
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- Douglas Hostland, "undated". "Monetary Policy and Medium-Term Fiscal Planning," Working Papers-Department of Finance Canada 2001-20, Department of Finance Canada.
- 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.
- Derek Hermanutz & Chris Matier, "undated". "Modelling Federal Finances under Uncertainty," Working Papers-Department of Finance Canada 2000-02, Department of Finance Canada.
- David Jamieson Bolder, 2001. "Affine Term-Structure Models: Theory and Implementation," Staff Working Papers 01-15, Bank of Canada.
- 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.