Modelling Public Debt Strategies

This paper puts forward a comprehensive framework to model medium-to-long term public debt refinancing strategies. Essentially the framework has two main building blocks. First, a large number of strategies are generated so as to determine a wide range of potential financing plans, regardless of whether they look conventional (close to current actual choices) or odd, provided they meet the Treasury's financing needs and legal constraints. Second, the performance of these viable strategies is measured in terms of current and future costs as well as various types of risk. As an add-on, through a panel model the framework accounts for the premium over current market rates that investors may demand in order to subscribe unusually large issues by the Treasury. All in all, this framework yields a frontier of efficient cost-risk outcomes. Moreover, it assesses how strategies perform when the interest rate forecasts relied on turn out to be wrong. Finally, it encompasses both a long-term perspective in debt management and a more tactical approach, allowing for time variant choices