Abstract
ABSTRACT We explore the effects of fiscal and monetary policy shocks on key debt management variables and provide empirical evidence supporting the notion of a strict separation of economic policy from the debt management agenda. We find that a tighter monetary policy coupled with fiscal expansion increases the risk that government debt will have to be rolled over at unusually high cost. This is especially the case in a downturn, where low or even negative interest rates often provide incentives for debt managers to invest predominantly in short-term bonds. Our findings echo the post-crisis environment of low or even negative interest rates, where many debt managers altered their portfolios’ structure in favor of short-term bonds. In this respect, we argue that debt managers should use a longer optimization horizon and base their strategy on the medium- and long-term economic outlook.
Highlights
Debt management was not a stand-alone policy, but was considered a part of fiscal or monetary policy
We explore the effects of fiscal and monetary policy shocks on key debt management variables and provide empirical evidence supporting the notion of a strict separation of economic policy from the debt management agenda
Note: Median impulse responses of the factor-augmented vector autoregression model (FAVAR) model with 2 lags are reported with 90% confidence bounds; responses are in percentage points; the x-axis is in quarters after the shock
Summary
Debt management was not a stand-alone policy, but was considered a part of fiscal or monetary policy. In 2001, the IMF and World Bank published a set of guidelines on public debt management for policymakers, which were later revised in response to financial sector regulatory changes and macroeconomic policy developments (IMF and WB, 2014). Debt managers took advantage of an all-time low nominal interest rate environment and altered the government debt portfolio structure in favor of short-term bonds.. Debt managers took advantage of an all-time low nominal interest rate environment and altered the government debt portfolio structure in favor of short-term bonds.1 MELECKÝ choice may increase the debt service costs and endanger debt sustainability once the monetary policy stance returns to neutral levels.2 In this respect, we argue that debt managers should use a longer optimization horizon and base their strategy on the medium- and long-term economic outlook..
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