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Modelling public debt strategies

Author

Listed:
  • Michele Manna

    () (Bank of Italy)

  • Emmanuela Bernardini

    () (Bank of Italy)

  • Mauro Bufano

    () (Bank of Italy)

  • Davide Dottori

    () (Bank of Italy)

Abstract

This paper puts forward a comprehensive framework to model medium-to-long term public debt refinancing strategies. Essentially the framework has two main building blocks. First, a large number of strategies are generated so as to determine a wide range of potential financing plans, regardless of whether they look conventional (close to current actual choices) or odd, provided they meet the Treasury�s financing needs and legal constraints. Second, the performance of these viable strategies is measured in terms of current and future costs as well as various types of risk. As an add-on, through a panel model the framework accounts for the premium over current market rates that investors may demand in order to subscribe unusually large issues by the Treasury. All in all, this framework yields a frontier of efficient cost-risk outcomes. Moreover, it assesses how strategies perform when the interest rate forecasts relied on turn out to be wrong. Finally, it encompasses both a long-term perspective in debt management and a more tactical approach, allowing for time variant choices.

Suggested Citation

  • 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.
    • Handle: RePEc:bdi:opques:qef_199_13
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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2013-0199/QEF_199.pdf
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    References listed on IDEAS

    as
    1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
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    3. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    4. David Jamieson Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
    5. David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Staff Working Papers 06-48, Bank of Canada.
    6. David Jamieson Bolder & Simon Deeley, 2011. "The Canadian Debt-Strategy Model: An Overview of the Principal Elements," Discussion Papers 11-3, Bank of Canada.
    7. Robert J. Barro, 1999. "Notes on Optimal Debt Management," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 281-289, November.
    8. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1105-1131.
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    11. Alessandro MISSALE & Emanuele BACCHIOCCHI, 2005. "Managing debt stability," Departmental Working Papers 2005-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
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    13. Massimo Bernaschi & Maya Briani & Marco Papi & Davide Vergni, 2007. "Scenario-generation methods for an optimal public debt strategy," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 217-229.
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    Cited by:

    1. Dottori, Davide & Manna, Michele, 2016. "Strategy and tactics in public debt management," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 1-25.

    More about this item

    Keywords

    refinancing strategy; public debt; government auctions;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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