Fiscal Insurance and Debt Management in OECD Economies

insurance insignHcantly and if other constraints restrict governments issuing more extreme portfolios
then it is perhaps understandable that cost minimisation or other objectives may dominate.

7 Conclusion

A growing literature investigates the role of debt management in supporting Hscal policy, what
we term “Hscal insurance”. We propose a battery of tests with which to assess the quality of
debt management and using Monte Carlo simulations suggest that performance indicators based
on the relative persistence of debt are most reliable. Using data on the market value of government
debt between 1970 and 2000 we Hnd substantial evidence to support Marcet and Scott (2004) in
their Hnding that bond markets are incomplete. Although we do detect di≡erences in the actual
quality of debt management across nations (with Norway performing the best and Belgium and
Netherlands the worst) we Hnd little evidence to link these variations in Hscal insurance to di≡erences
in debt structure. We argue that this is because relative yields show little variation and so minor
variations in debt composition have little e≡ect on Hscal insurance. Given these Hndings achieving
better Hscal insurance will require either holding more extreme portfolio positions, issuance of
new forms of contingent securities or magnifying existing positions through the use of derivatives.
Our lack of signiHcant empirical results also provides a possible justiHcation for why traditionally
debt management offices have focused on objectives other than Hscal policy in deciding their debt
issuance policy.

8 References

Angeletos, G (2002) Fiscal Policy with Non-contingent debt and the Optimal Maturity Structure
Quarterly Journal of Economics, 117(2)

Barro, R.J (1979) On the Determination of Public Debt Journal of Political Economy 64, 93-110

Barro, R.J (1997) Optimal Management of Indexed and Nominal Debt NBER Working Paper
No.6197

Benigno, Pierpaolo and Woodford, M (2003) Optimal monetary and fiscal policy : A linear
quadratic approach NBER Macroeconomics Annual 2003

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