Not taking debt at face value, or market value or amortized cost: Policy value as a measure of the burden of public debt

Abstract

AbstractPublic debt is sometimes measured at its market value or amortized cost, the measurement bases prescribed by international accounting standards and statistical guidelines. But an overview of 191 countries and a closer investigation of 19 shows that public debt is most often measured at face value. An analysis of the three measurement bases and the discount rates on which they explicitly or implicitly depend shows that all are unsatisfactory as indicators of the burden that the debt imposes on the government. On the one hand, face value is manipulable: governments can borrow as much as they wish while reporting virtually no debt at all at face value. Though no government has done this, there is some, inconclusive evidence that a few may have exploited the manipulability of face value to slow the growth of reported debt. On the other hand, market value and amortized cost are unsatisfactory because they vary with the government's creditworthiness. Thus, for example, the market value of a government's debt declines as the government becomes financially distressed. An alternative measurement basis is proposed here that does not suffer from these problems, namely policy value, which is the value of the debt conditional on the government's carrying out its policy toward the debt, or the present value of planned debt payments at the debt's market interest rate less any credit‐risk premium in that rate.