Fiscal Insurance and Debt Management in OECD Economies

a substantial difference in performance. By proposing indicators of fiscal insurance the aim of this
paper is to try and remedy this gap and provide a less model specific approach to analysing debt
management.

The simplicity of our performance indicators also contrasts with the simulation approach used
in a number of recent studies by debt management organisations (see Bergstrom et al (2002),
Bolder (2003), Pick and Anthony (2006)). The approach of these papers is to make a number
of assumptions regarding the underlying structure of the economy, specify a policy rule for the
setting of interest rates as well as a model for how these fluctuations impact on the yield curve
and then perform a detailed analysis of alternative debt portfolios, normally with a focus on the
average funding cost. By contrast our approach to ranking debt management strategies requires
fewer assumptions and is based on purely empirical information.

The structure of the paper is as follows. In Section 2 we outline a number of potential measures
of fiscal insurance, motivated both by theory and fiscal accounting identities. In Section 3 we
consider the relationship between two different motivations for our focus on fiscal insurance - tax
smoothing and debt stability. Section 4 then uses simulations of a stochastic dynamic general
equilibrium model to investigate the performance of these fiscal insurance measures, their ability
to discriminate between different debt management strategies and draws recommendations as to
the most reliable measures. A key focus of our analysis is the importance of working with the
market value of debt rather than the more readily available outstanding value of debt. Therefore
Section 5 calculates the market value of debt for a range of OECD economies. Section 6 uses this
data to calculate fiscal insurance measures for a range of OECD economies since 1970 and finds
little evidence that debt management has provided much support to fiscal policy. This section
also performs cross section regressions to estimate whether these differences in performance are
connected with differences in debt composition but finds little evidence of any relationship. A final
section concludes.

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