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Scope for Cost Minimization in Public Debt Management: the Case of the UK

  • Coe, P.J.
  • Pesaran, M.H.
  • Vahey, S.P.

This paper provides a framework for an empirical analysis of the scope for cost minimization in public debt management. It assumes that a debt manager aims at minimizing the expected cost of government’s debt portfolio for a given level of short term interest rate and subject to a number of risk and market impact constraints. The analysis is applied to the UK government debt over the period April 1985 to March 2000, by simulating “real time” interest costs of alternative portfolios constructed using monthly forecasts of return spreads based on recursive modelling (RM) procedure recently developed by Pesaran and Timmermann (1995, 2000), which limits the extent of data snooping. Statistically significant evidence of predictability of return spreads are provided before the introduction of reforms of the UK debt management system in 1995, although there seems to be little evidence of predictability once the post reform sample is included. Nevertheless, there appears to have been some scope for a small reduction in interest costs over the 1985-2000 period even if portfolio shares and their monthly changes are constrained to lie within historically observed upper and lower bounds in order to minimize the market impact effects of such changes.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0338.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0338.

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Length: 35
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:cam:camdae:0338
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Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Pesaran, M.H. & Timmermann, A.G., 1992. "A Generalisation of the Non-Parametric Henriksson-Merton Test of Market Timing," Cambridge Working Papers in Economics 9218, Faculty of Economics, University of Cambridge.
  2. Pesaran, M. Hashem & Potter, Simon M., 1997. "A floor and ceiling model of US output," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 661-695, May.
  3. Allan Timmermann & Halbert White & Ryan Sullivan, 1998. "Data-Snooping, Technical Trading, Rule Performance and the Bootstrap," FMG Discussion Papers dp303, Financial Markets Group.
  4. Egginton, Donald & Andreas Pick & Shaun P. Vahey, 2002. "Keep It Real!: A Real-time UK Macro Data Set," Royal Economic Society Annual Conference 2002 69, Royal Economic Society.
  5. Pesaran, M. H. & Timmermann, A., 1996. "A Recursive Modelling Approach to Predicting UK Stock Returns'," Cambridge Working Papers in Economics 9625, Faculty of Economics, University of Cambridge.
  6. Aiolfi, Marco & Favero, Carlo A., 2003. "Model Uncertainty, Thick Modelling and the Predictability of Stock Returns," CEPR Discussion Papers 3997, C.E.P.R. Discussion Papers.
  7. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
  8. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
  9. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  10. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  11. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  12. Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-28, September.
  13. George J. Hall & Thomas J. Sargent, 1997. "Accounting for the federal government's cost of funds," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 18-28.
  14. Pesaran, M.H. & Timmermann, A., 1990. "A Simple Non-Parametric Test Of Predictive Performance," Papers 29, California Los Angeles - Applied Econometrics.
  15. D M Egginton & S G Hall, 1993. "An investigation of the effect of funding on the slope of the yield curve," Bank of England working papers 6, Bank of England.
  16. Engle, Robert F, 2000. "Dynamic Conditional Correlation - A Simple Class of Multivariate GARCH Models," University of California at San Diego, Economics Working Paper Series qt56j4143f, Department of Economics, UC San Diego.
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