IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Debt Management Under Complete Markets

Listed author(s):
  • Elisa Faraglia


    (Department of Economics London Business School)

  • Albert Marcet
  • Andrew Scott

In an influential paper Angeletos (2002) argues that, even in the absence of state contingent debt, governments can achieve a complete market outcome through issuing bonds of different maturities. The key insight is that fluctuations in the yield curve are exploited through holding or selling bonds of different maturities. This framework can therefore be used to provide insights into optimal debt management. Angeletos further claims that even if the conditions for this result (namely that there exist more maturities than there are states of nature) do not hold exactly governments can still use debt management to get close to the first best. Nosbusch (2006) provides some simulation based support for this claim. In this paper we review the ability of this complete market approach to provide a plausible model of debt management. In the first section we outline some properties of OECD debt management since 1970. We find that the composition of government debt shows substantial stability over time; governments issue positive amounts of debt instruments and that these are always a relatively small proportion of GDP. We then consider, both analytically and numerically, the implications of models of debt management where maturity structure is used to achieve complete market outcomes. In particular, we extend the existing literature in two significiant directions - by adding capital accumulation and ruling out the assumption that governments buyback all their debt every period and then restructure. Buera and Nicolini (2004) have already documented how in a basic model the complete market approach to debt management requires governments to hold debt positions which are huge positive and negative multiples of total output. We show how introducing capital accumulation and forcing authorities to hold debt to maturity exacerbates this problem even further. It also creates additional problems which reveal that the implications of the model for debt management are wildly at odds with the observed practive of OECD countries. Not only does the model recommend extreme positions but optimal positions show great sensitivity to small changes in the model and recommended portfolio shares are not a smooth function of maturity. Further allowing for capital accumulation also overturns the strong predictions of these models to issue long term debt and buy short term bonds. We conclude by offering some insights as to why the complete market approach to debt management has such strong counterfactual predictions and suggest areas of future research to provide a more plausible model of debt management.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 540.

in new window

Date of creation: 03 Dec 2006
Handle: RePEc:red:sed006:540
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed006:540. 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: (Christian Zimmermann)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.