Working Paper: CEPR ID: DP2655
Authors: Alessandro Missale; Francesco Giavazzi; Pierpaolo Benigno
Abstract: 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.
Keywords: credibility; debt maturity; public debt management; stabilization
JEL Codes: E63; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Governments increase the share of fixed-rate long-term debt denominated in domestic currency (H63) | Higher conditional volatility of short-term interest rates (E43) |
| Governments increase the share of fixed-rate long-term debt denominated in domestic currency (H63) | Lower long-term interest rates (E43) |
| Long-term interest rates exceed government expectations (E43) | Issue short-term debt (H63) |
| Long-term interest rates exceed government expectations (E43) | Minimize borrowing costs (G51) |
| Debt managers prioritize long-term debt when anticipating stable or declining interest rates (H63) | Pivot to short-term debt when facing high long-term rates (E43) |
| Expectations of future interest rate movements (E43) | Government behavior regarding debt maturity choices (H63) |