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Imperfect Government Insurance and Treasury Securities Markets

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  • Oscar Mauricio VALENCIA ARANA

Abstract

One important financial source for any government is the treasury market. Although a full government control over the interest rate is desirable, microeconomic-strategic behavior in the treasury securities often lead to collusive and precautionary agent behavior affecting government revenues. This paper shows that this behavior has not only consequences over the government income but also over the implementation of the optimal fiscal policy. Two main results are obtained: First, when the government uses uniform auction, a Ramsey policy can be implemented given that agents face a clearing price vector. Second, when the government uses a discriminatory auction format, the Ramsey outcome is not achievable because the optimal value of debt is state dependent. According to this, government losses full control over the interest rate and therefore over the optimal structure of public debt.

Suggested Citation

  • Oscar Mauricio VALENCIA ARANA, 2006. "Imperfect Government Insurance and Treasury Securities Markets," Archivos de Economía 002814, Departamento Nacional de Planeación.
  • Handle: RePEc:col:000118:002814
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    More about this item

    Keywords

    Optimal public debt and Treasury Auctions;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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