This paper illustrates how a parsimonious macro-finance model can be exploited to investigate the frequency-domain properties of debt service implied by various financing srategies. This original approach is valuable to public debt managers seeking to assess the fiscal-hedging properties of the financing strategies they implement. The model, inspired by Rudebusch and Wu (2008), is estimated on euro-area data over the period 1999-2009. At business-cycle frequencies, the variance of interest payments is lower when nominal long-term bonds are issued. From a budget-smoothing perspective, debt service variability plays a major role, but pro- or counter-cyclicality of debt service also matters. In this respect, the results suggest that while interest payments associated with medium- to long-term nominal bonds are negatively correlated with real activity, those associated with inflation-linked bonds and short-term nominal bonds tend to be pro-cyclical.
Classification JEL : C51, E32, E43, G12, H63.
Keywords : macro-finance model, spectral analysis, term-structure of interest rates, public debt management.
Updated on: 04/19/2019 10:23