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Faculty of Economics

Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A.

Government Debt management: the Short and the Long of it

Review of Economic Studies, accepted

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 US 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 paper is introducing a novel computational method to fi nd global solutions.


Papers and Publications



Recent Publications


Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A. Government Debt management: the Short and the Long of it Review of Economic Studies, accepted [2018]

Rendahl, P. Fiscal policy in an unemployment crisis Review of Economic Studies [2016]

Cesarani, D., Lindqvist, E., Ostling, R. and Wallace, B. Wealth, health, and child development: evidence from administrative data on Swedish lottery players Quarterly Journal of Economics [2016]

Choi, S., Galeotti, A and Goyal, S. Trading in networks Journal of the European Economic Association [2017]