| Abstract: |
Recent research suggests that management of the public sector’sdebt can have important effects on a country’s macroeconomicperformance. This article provides an overview of the factorsthat the recent literature has identified as important in determiningthe optimal composition of the public debt. Based on this analysis,it attempts to establish general guidelines for public debtmanagement in emerging economies. To retain market access andpromote domestic financial market development, governments shouldgenerally finance themselves at market rates using a wide varietyof securities. Beyond this general principle, the optimal compositionof the public debt involves a tradeoff between enhancing thegovernment’s anti–inflationary credibility and reducingthe vulnerability of its budget to macroeconomic shocks. Consequently,the optimal composition of the debt depends on a country’scircumstances. Debt should be heavily weighted toward long-termnominal securities for governments that have anti–inflationarycredibility and toward long-term indexed debt for those thatdo not. |
