Government Debt Management: The Long and the Short of It

Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew

doi:10.1093/restud/rdy061

Cited by 35 publications

(57 citation statements)

References 39 publications

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“…In some cases, the recursive Lagrangian has many fewer state variables. Consider generalizing Example 2 to the case where the government issues one long bond that matures in M periods and long bonds are not repurchased by the government, as in Faraglia, Marcet, Oikonomou, and Scott (, ). In this case, the bond price depends on the expectation of marginal utility M periods ahead, so that the analog of () gives

b_{t + 1}^{M} β^{M} \sum_{{\overset{g}{true}}^{M} \in G^{M}} u^{'} true2.4ex2.4ex(c_{t + M} true2.4ex2.4ex(g_{t}, {\overset{g}{true}}^{M} true2.4ex2.4ex) true2.4ex2.4ex) \overset{π}{true} true2.4ex2.4ex({\overset{g}{true}}^{M} true2.4ex2.4ex) = u^{'} false(c_{t} false) true2.4ex2.4ex(b_{t - M + 1}^{M} - c_{t} true2.4ex2.4ex) - e_{t} v^{'} false(e_{t} false),

where we denote

G^{i}

the set of all possible realizations of

false(g_{t + 1}, \dots, g_{t + i} false)

, and

{\overset{π}{true}}^{κ} false({\overset{g}{true}}^{M} false)

the probability of each sequence.…”

Section: Related Workmentioning

confidence: 99%

“… Among others: Faraglia, Marcet, Oikonomou, and Scott () in a model where the government has to choose a portfolio of maturities; Marcet and Scott () in a model with capital. Schmitt‐Grohé and Uribe () and Siu () introduced nominal bonds and the role of monetary policy; Adam and Billi () introduced a zero lower bound to interest rates. …”

mentioning

confidence: 99%

“… See Faraglia, Marcet, Oikonomou, and Scott (, Section 3 for details, and Sections 5, 6, 7 for the state variables in several variations of the model). …”

mentioning

confidence: 99%

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Recursive Contracts

Marcet

Marimon

2019

ECTA

Self Cite

115

149

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We obtain a recursive formulation for a general class of optimization problems with forward-looking constraints which often arise in economic dynamic models, for example, in contracting problems with incentive constraints or in models of optimal policy. In this case, the solution does not satisfy the Bellman equation. Our approach consists of studying a recursive Lagrangian. Under standard general conditions, there is a recursive saddle-point functional equation (analogous to a Bellman equation) that characterizes a recursive solution to the planner's problem. The recursive formulation is obtained after adding a co-state variable μ t summarizing previous commitments reflected in past Lagrange multipliers. The continuation problem is obtained with μ t playing the role of weights in the objective function. Our approach is applicable to characterizing and computing solutions to a large class of dynamic contracting problems.

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b_{t + 1}^{M} β^{M} \sum_{{\overset{g}{true}}^{M} \in G^{M}} u^{'} true2.4ex2.4ex(c_{t + M} true2.4ex2.4ex(g_{t}, {\overset{g}{true}}^{M} true2.4ex2.4ex) true2.4ex2.4ex) \overset{π}{true} true2.4ex2.4ex({\overset{g}{true}}^{M} true2.4ex2.4ex) = u^{'} false(c_{t} false) true2.4ex2.4ex(b_{t - M + 1}^{M} - c_{t} true2.4ex2.4ex) - e_{t} v^{'} false(e_{t} false),

where we denote

G^{i}

the set of all possible realizations of

false(g_{t + 1}, \dots, g_{t + i} false)

, and

{\overset{π}{true}}^{κ} false({\overset{g}{true}}^{M} false)

the probability of each sequence.…”

Section: Related Workmentioning

confidence: 99%

mentioning

confidence: 99%

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Recursive Contracts

Marcet

Marimon

2019

ECTA

Self Cite

115

149

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show abstract

“…Buera and Nicolini (2004) and Angeletos (2002) represent benchmark specifications in an incomplete market setting with debt of different maturities. These models fail to observe typical treasury behavior that more recent literature tries to replicate by means of restricting the government from going short in any maturity (Lustig, Sleet, and Yeltekin (2008), restricting the government's ability to commit (Debortoli et al, 2017), tying model closer to observed asset prices (Bhandari et al, 2017), considering the price impact of each issuance of an impatient government (Bigio, Nuño, & Passadore, 2018) and restricting the government ability to rebalance its portfolio (Faraglia et al, 2018).…”

Section: Literaturementioning

confidence: 99%

Confederation debt management since 1970

Guggenheim

Meichle²,

Nellen

2019

Swiss J Economics Statistics

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This paper analyzes the Confederation's debt management. The Confederation actively manages roll over and interest rate risk by increasing bond maturity with increasing marketable debt-to-GDP levels. It further engages in active but asymmetric, one-sided interest rate positioning; i.e., it uses mostly bonds to affect debt maturity and does so only when the interest rate environment is favorable to lock-in interest rates by issuing longer-term bonds. Debt management is mainly driven by marketable debt rather than total debt. Issuing behavior became more regular and demand-oriented during the early 1990s when marketable and total debt increased in tandem.

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“…4 Angeletos (2002), Bhandari et al (2017), Buera and Nicolini (2004), Faraglia et al (2010Faraglia et al ( , 2018, Guibaud et al (2013), andLustig et al (2008) also consider optimal government debt maturity in the presence of shocks, but they assume full commitment.…”

Section: Introductionmentioning

confidence: 99%

Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

Debortoli

Nunes

Yared

2021

Journal of Political Economy

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According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not necessarily tax above the peak of the Laffer curve, even if it is ex-ante optimal to do so.

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Government Debt Management: The Long and the Short of It

Cited by 35 publications

References 39 publications

Recursive Contracts

Recursive Contracts

Confederation debt management since 1970

Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

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