Author: Montiel, Peter J.

Source: World Bank Research Observer, Volume 20, Number 2, 2005 , pp. 259-281(23)

Publisher: Oxford University Press

Abstract:

Recent research suggests that management of the public sector’s debt can have important effects on a country’s macroeconomic performance. This article provides an overview of the factors that the recent literature has identified as important in determining the optimal composition of the public debt. Based on this analysis, it attempts to establish general guidelines for public debt management in emerging economies. To retain market access and promote domestic financial market development, governments should generally finance themselves at market rates using a wide variety of securities. Beyond this general principle, the optimal composition of the public debt involves a tradeoff between enhancing the government’s anti–inflationary credibility and reducing the vulnerability of its budget to macroeconomic shocks. Consequently, the optimal composition of the debt depends on a country’s circumstances. Debt should be heavily weighted toward long-term nominal securities for governments that have anti–inflationary credibility and toward long-term indexed debt for those that do not.

Document Type: Research article

DOI: http://dx.doi.org/10.1093/wbro/lki006

Publication date: 2005-01-01

More about this publication?

• The World Bank Research Observer seeks to inform nonspecialist readers about research being undertaken within the Bank and outside the Bank in areas of economics relevant for development policy. Requiring only a minimal background in economic analysis, its surveys and overviews of key issues in development economics research are intended for policymakers, project officers, journalists keeping up to date, and teachers and students of development economics and related disciplines. Papers for the Observer are not sent out to referees, but all articles published are assessed and approved by the Editorial Board, which includes three to four distinguished economists from outside the Bank. The Observer has nearly 1,500 subscribers in OECD countries and nearly 10,000 subscribers in developing countries.
  
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