IDEAS home Printed from https://ideas.repec.org/p/cfm/wpaper/1727.html
   My bibliography  Save this paper

Managing the UK National Debt 1694-2017

Author

Listed:
  • Martin Ellison

    (Centre For Economic Policy Research (CEPR)
    Centre for Macroeconomics (CFM)
    Department of Economics Oxford University)

  • Andrew Scott

    (Centre For Economic Policy Research (CEPR)
    Department of Economics London Business School (LBS))

Abstract

We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity effects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.

Suggested Citation

  • Martin Ellison & Andrew Scott, 2017. "Managing the UK National Debt 1694-2017," Discussion Papers 1727, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1727
    as

    Download full text from publisher

    File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2017/CFMDP2017-27-Paper.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. George J. Hall & Thomas J. Sargent, 2011. "Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 192-214, July.
    2. Robert Barro, 2003. "Optimal Management of Indexed and Nominal Debt," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 1-15, May.
    3. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 821-836, October.
    4. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1914-1961.
    5. Breedon, Francis, 2018. "On the transactions costs of UK quantitative easing," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 347-356.
    6. Klovland, Jan Tore, 1994. "Pitfalls in the Estimation of the Yield on British Consols, 1850–1914," The Journal of Economic History, Cambridge University Press, vol. 54(1), pages 164-187, March.
    7. 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.
    8. Nicholas Crafts, 2016. "Reducing High Public Debt Ratios: Lessons from UK Experience," Fiscal Studies, Institute for Fiscal Studies, vol. 37, pages 201-223, June.
    9. Yves Nosbusch, 2008. "Interest Costs and the Optimal Maturity Structure Of Government Debt," Economic Journal, Royal Economic Society, vol. 118(527), pages 477-498, March.
    10. Butkiewicz, James L., 1983. "The market value of outstanding government debt : Comment," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 373-379.
    11. Dong Lou & Hongjun Yan & Jinfan Zhang, 2013. "Anticipated and Repeated Shocks in Liquid Markets," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1891-1912.
    12. William A Allen, 2012. "Government debt management and monetary policy in Britain since 1919," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 15-50, Bank for International Settlements.
    13. Lustig, Hanno & Sleet, Christopher & Yeltekin, Sevin, 2008. "Fiscal hedging with nominal assets," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 710-727, May.
    14. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    15. William A. Allen, 2012. "Quantitative monetary policy and government debt management in Britain since 1919," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 804-836, WINTER.
    16. 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.
    17. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
    18. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How Britain paid for war: bond holders in the Great War 1914-32
      by BankUnderground in Bank Underground on 2021-01-18 09:00:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Josefin Meyer & Carmen M Reinhart & Christoph Trebesch, 2022. "Sovereign Bonds Since Waterloo," The Quarterly Journal of Economics, Oxford University Press, vol. 137(3), pages 1615-1680.
    2. FitzGerald, John & Kenny, Seán, 2018. "Managing a Century of Debt," Lund Papers in Economic History 171, Lund University, Department of Economic History.
    3. Mr. Philip Barrett, 2018. "Interest-Growth Differentials and Debt Limits in Advanced Economies," IMF Working Papers 2018/082, International Monetary Fund.
    4. Miguel Cantillo Simon, 2019. "Using long term implied volatilities to assess past and present U.S. stock prices," Working Papers 201908, Universidad de Costa Rica, revised Dec 2019.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1914-1961.
    2. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2017. "Optimal Time-Consistent Government Debt Maturity," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 55-102.
    3. Basil Guggenheim & Mario Meichle & Thomas Nellen, 2019. "Confederation debt management since 1970," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-23, December.
    4. Marcet, Albert & Scott, Andrew, 2009. "Debt and deficit fluctuations and the structure of bond markets," Journal of Economic Theory, Elsevier, vol. 144(2), pages 473-501, March.
    5. Hans J. Blommestein & Anja Hubig, 2012. "A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management," OECD Working Papers on Sovereign Borrowing and Public Debt Management 4, OECD Publishing.
    6. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2014. "Modelling Long Bonds - The Case of Optimal Fiscal Policy," CEPR Discussion Papers 9965, C.E.P.R. Discussion Papers.
    7. Bouakez, Hafedh & Oikonomou, Rigas & Priftis, Romanos, 2018. "Optimal debt management in a liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 5-21.
    8. Equiza-Goni, Juan & Faraglia, Elisa & Oikonomou, Rigas, 2016. "Union Debt Management," CEPR Discussion Papers 11181, C.E.P.R. Discussion Papers.
    9. Saki Bigio & Galo Nuño & Juan Passadore, 2019. "Debt-Maturity Management with Liquidity Costs," NBER Working Papers 25808, National Bureau of Economic Research, Inc.
    10. Elisa Faraglia & Albert Marcet & Andrew Scott, 2008. "Fiscal Insurance and Debt Management in OECD Economies," Economic Journal, Royal Economic Society, vol. 118(527), pages 363-386, March.
    11. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176, Bank for International Settlements.
    12. 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.
    13. Saki Bigio & Galo Nuño & Juan Passadore, 2019. "A framework for debt-maturity management," Working Papers 1919, Banco de España.
    14. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2021. "Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey," Journal of Political Economy, University of Chicago Press, vol. 129(5), pages 1640-1665.
    15. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 821-836, October.
    16. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    17. Niepelt, Dirk, 2018. "Financial Policy," CEPR Discussion Papers 12755, C.E.P.R. Discussion Papers.
    18. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2020. "Manufacturing Risk-free Government Debt," NBER Working Papers 27786, National Bureau of Economic Research, Inc.
    19. Alaa Soliman & Mohammad Aliu Momoh & Ibrahim L. Awad, 2017. "Infrastructure Guarantees: Making It Simple," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 178-202.
    20. 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.

    More about this item

    Keywords

    Debt management; Fiscal Deficits; Fiscal Policy; Goveernment Debt; Inflation maturity; Yield curve;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cfm:wpaper:1727. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cmlseuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Helen Power (email available below). General contact details of provider: https://edirc.repec.org/data/cmlseuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.