Abstract
Within the context of currency and maturity choice, and indexation, this paper seeks to find the policy implications of a tax smoothing approach to public debt management. This objective is achieved in two ways. Firstly, the tax smoothing approach of Bohn (1990) is adapted to incorporate realistic constraints on public debt management. Secondly, this adapted methodology is applied to data on nine OECD countries. Results suggest that, for eight out of the nine countries, short-term domestic debt should be the dominant security issued and that tax smoothing can be further enhanced by the government purchasing, rather than issuing, some other securities. The paper provides a rationale for why the hedging benefits of short-term domestic currency debt dominate those of the other forms of debt considered.
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