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Strategy and tactics in public debt management

Author

Listed:
  • Davide Dottori

    (Bank of Italy)

  • Michele Manna

    (Bank of Italy)

Abstract
We examine the public debt management problem with respect to the maturity mix of new issues in a mean-variance framework. After identifying the main determinants of the long-run target (strategy), we focus on which interest rate conditions allow for a temporary deviation (tactics). The study is partly motivated by the apparent ‘window of opportunity’ to issue more heavily at longer maturities given the recent historically low yields. We show that the room for long tactical positions on the long-term bond is actually narrower than predicted by rules of thumb based on Sharpe-like ratios. Once the model is augmented to embed real world features such as no price-taking and transaction costs, the scope for tactical position shrinks further. We discuss the model results and its implications in terms of the principal-agent dilemma (government vs. debt manager); the paper also explores the financial stability implications arising from public debt issuance choices. All in all, our findings provide a rationale for the degree of caution often shown by many public debt managers in fulfilling their mandate.

Suggested Citation

  • Davide Dottori & Michele Manna, 2015. "Strategy and tactics in public debt management," Temi di discussione (Economic working papers) 1005, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1005_15
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    References listed on IDEAS

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    2. Cafiso, Gianluca, 2019. "Sovereign bond markets when auctions take place: Evidence from Italy," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 406-430.
    3. Wolswijk, Guido, 2020. "Drivers of European public debt management," Working Paper Series 2437, European Central Bank.

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    More about this item

    Keywords

    public debt management; government bond market; issuance maturity; agency problems; financial stability;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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