Abstract
This paper shows how public debt repurchases can be used to reduce the costs of debt service, under the hypothesis of asymmetry of information between the government and the private sector. At the beginning of a fiscal stabilisation, for example, a government typically does not enjoy full credibility among investors and interest rates could incorporate excessive risk premia, reflecting this lack of credibility. The idea of this paper is that buybacks could be used to eliminate unfair risk premia since they can signal the government commitment to an announced policy.
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