Fiscal Insurance and Debt Management in OECD Economies

Provided by Research Papers in Economics

Fiscal Insurance and Debt Management in OECD Economies*

Elisa FaragliaJ Albert Marcet^and Andrew Scott§

9th October 2007

Abstract

Assuming the role of debt management is to provide hedging against fiscal shocks we consider
three questions: i) what indicators can be used to assess the performance of debt management? ii)
how well have historical debt management policies performed? and iii) how is that performance
affected by variations in debt issuance? We consider these questions using OECD data on the
market value of government debt between 1970 and 2000.

Motivated by both the optimal taxation literature and broad considerations of debt stability
we propose a range of performance indicators for debt management. We evaluate these using
Monte Carlo analysis and find that those based on the relative persistence of debt perform
best. Calculating these measures for OECD data provides only limited evidence that debt
management has helped insulate policy against unexpected fiscal shocks. We also find that
the degree of fiscal insurance achieved is not well connected to cross country variations in debt
issuance patterns. Given the limited volatility observed in the yield curve the relatively small
dispersion of debt management practices across countries makes little difference to the realised
degree of fiscal insurance.

^tWe are grateful to Giovanni Addis and Alexis Anagnostopoulus for research assistance. Marcet’s research was
funded in part by CREI, DGES, CREA program of "Barcelona Economics" and CIRIT. Faraglia and Scott’s contri-
bution was funded by a research grant from the ESRC’s World Economy and Finance program. We thank Mrvyn
Anthony and three referees for comments as well as seminar participants at Cambridge University, London Business
School and the 2007 Warwick Royal Economic Society Conference.

^Department of Economics, London Business School. efaraglia©london.edu

* Institut d’Anàlisi Economica, CSIC and CEPR albert.marcet©iae.csic.es

§ Department of Economics, London Business School and CEPR. ascottQlondon.edu

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