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A Critical Analysis of the Technical Assumptions of the Standard Micro Portfolio Approach to Sovereign Debt Management

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  • Hans J. Blommestein

    (OECD)

  • Anja Hubig

    (Humboldt University of Berlin)

Abstract

This paper examines the analytical underpinnings of the standard micro portfolio approach to public debt management (PDM) that aims at minimising longer-term cash-flow based borrowing costs at an acceptable level of risk. The study concludes that two technical key assumptions need to hold for the standard micro portfolio approach to yield optimal (i.e. cost-minimising) results. We argue that these assumptions do not hold in the current borrowing environment characterized by fiscal dominance with complex links between PDM and monetary policy (MP). By using the principles of portfolio theory we demonstrate that in this borrowing environment, cost-risk optimality requires the use of a broader cost concept than employed in the standard micro portfolio approach. This new concept (referred to as effective borrowing costs) incorporates not only the cash flows of the debt portfolio itself, but also those related to primary borrowing requirements. The resulting broader cost measure includes therefore the interactions with the budget. Finally, the paper demonstrates that the standard cost-risk framework of the micro portfolio approach is nested within this new, broader cost concept.

Suggested Citation

  • 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.
    • Handle: RePEc:oec:dafaaf:4-en
    DOI: 10.1787/5k9fdwrf5rvj-en
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    References listed on IDEAS

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    Cited by:

    1. Scott Regifère MOUANDAT, 2021. "dette optimale au Gabon," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 12(1), pages 132-149, June.
    2. 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.
    3. Sónia Araújo & Stéphanie Guichard, 2018. "Costa Rica: Restoring fiscal sustainability and setting the basis for a more growth-friendly and inclusive fiscal policy," OECD Economics Department Working Papers 1484, OECD Publishing.
    4. Scott Régifère Mouandat, 2021. "Optimal debt in Gabon: an analysis in term of foreign currency compositions [La dette optimale au Gabon: une analyse en termes de composition en devises]," Post-Print hal-03326826, HAL.

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    More about this item

    Keywords

    central banks; fiscal policy; government borrowing; monetary policy; public debt management; sovereign debt; sovereign risk;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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