How is the Debt Managed? Learning from Fiscal Stabilizations

This Paper provides evidence on the behaviour of public debt managers during fiscal stabilizations. Such episodes provide valuable information on the way debt instruments are chosen because they allow the problem of policymakers' expectations of interest rates not generally being observable to be overcome. We find that governments increase the share of fixed-rate long-term debt denominated in the domestic currency, causing the conditional volatility of short-term interest rates to become higher, long-term interest rates to become lower, and the fall in long-term rates, that follows the announcement of the stabilization program, to become stronger. In contrast, conventional measures of the relative cost of issuing long-term debt, such as the long-short interest-rate spread, are not significant. This evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned with the risk of refinancing at higher than expected interest rates. However, when long-term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs.