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Government Debt Management: The Long and the Short of It

Faraglia, E; Marcet, A; Oikonomou, R; Scott, A; (2019) Government Debt Management: The Long and the Short of It. The Review of Economic Studies , 86 (6) pp. 2554-2604. 10.1093/restud/rdy061. Green open access

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Abstract

Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue (r/r) new ones. These features of DM are inconsistent with U.S. data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively, long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions.

Type: Article
Title: Government Debt Management: The Long and the Short of It
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/restud/rdy061
Publisher version: https://doi.org/10.1093/restud/rdy061
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10069237
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