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How is the Debt Managed? Learning from Fiscal Stabilizations
Author(s) -
Missale Alessandro,
Giavazzi Francesco,
Benigno Pierpaolo
Publication year - 2002
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00296
Subject(s) - economics , monetary economics , debt , interest rate , maturity (psychological) , term (time) , volatility (finance) , debt to gdp ratio , currency , debt ratio , internal debt , macroeconomics , financial economics , psychology , developmental psychology , physics , quantum mechanics
This paper examines public debt management during episodes of fiscal stabilization when long–term interest rates are generally higher than governments’ expectations of future rates. We find that governments increase the share of fixed–rate long–term debt denominated in the domestic currency, the higher is the conditional volatility of short–term interest rates, the lower are long–term interest rates, and the stronger is the fall in long–term rates that follows the announcement of the stabilization program. This evidence suggests that governments tend to prefer long to short maturity debt because they are concerned about refinancing risk. However, when long–term rates are high relative to their expectations, they issue short maturity debt to minimize borrowing costs. JEL classification : E 63; H 63