Government Debt Management at th

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Discussion b

y Janice Eberl

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James R. and Helen D. Russell Professor of Finance
Main message: you can’t have it both w

• There is a national interest in the maturity structure, influenced 

• Fiscal cost• Fiscal risk• Aggregate demand• Financial stability & liquidity

• W i t li idit h ld l h t We now appreciate liquidity more => s

hould lean s

horte

r

• But how, given the various actors and objectives? 

• Two instruments and four objectives

• Consolidate and Coordinate

Finance Department @ Jan
Main message: you can’t have it both w

• There is a national interest in the maturity structure, influenced 

• Fiscal cost• Fiscal risk• Aggregate demand• Financial stability & liquidity

• W i t li idit h ld l h t We now appreciate liquidity more => s

hould lean s

horte

r

• But how, given the various actors and objectives? 

• Two instruments and four objectives

• Consolidate and Coordinate

“At the zero lower bound,

a fully coordinated policy

...

Finance Department @ Jan

should be the norm.”
Beneath the sound of the alarms

• Academic-policy hybrid research

– St ir p away i tit ti t instit

utions 

to see th i ith l it th 

the issue with clarity, the

back most relevant frictions

– “most relevant” is alwa

ys the issue

• Measurement 

– we only know what we can measure

– Attempt to quantify and add evidence to the discussio

• Institutional structure

Finance Department @ Jan
Main message: you can’t have it both w

Policies to promote aggregate demand try to lower private lo

interest rates interest rates

– the Fed buys long term assets to the Fed buys long term assets to reduce 

reduce 

held by private investors

Policies to lengthen the maturity of government debt increas

supply of long term Treasuries to the private market

These policies work at These policies work at cross

-purposes purposes.

Finance Department @ Jan

Suggests a consolidated/netting appro

When is the consolidated approach in/appropriate?The main objectives don The main objectives don t’ all lend themselves to consolidatin

all lend themselves to consolidatin

Treasury issuance and (independent) Fed holdings

1. Fiscal cost (why are some securities on “special”?)2. Fiscal risk (refunding/rollover risk, budget risk)3. Aggregate demand (net to private holdings)4. Financial Stability Financial Stability, Liquidity (net to private holdings?) Liquidity (net to private holdings?)

Finance Department @ Jan
Quantifiable for policy?

• If we were comfortable with previous maturity structure, then there 

force to go short

– So we should be shorter than before

– Were we right before? What else has changed?

– Greater demand for Treasuries with regulatory changes

• “Fill in the cracks” with bills

– Other arrangements to provide liquidity? Other arrangements to provide liquidity?

• Segregated reserve accounts? On-the-run LT bonds? 

– How do these affect the consolidated policy and cost?

• Open economy and crisis consideratio Open economy and crisis considerations around cost minimization 

around cost minimization 

argument –

– Should we always expect rates to be low in a crisis?– Recent reversals in stock-bond correlations suggest interest ra

larger => reducing term larger => reducing term premia

Finance Department @ Jan

Institutions

Many institutions have partial mandates, and government re

divides responsibility among divides responsibility among them.

Political economy gives reasons for this, though it is certainl

always well-founded or efficient in practice.

Are the Fed and the Treasury different?

Congress has the power to tax

Treasury – The S t ecre ary h f ll th it t d i i t 

has full authority to administer 

enforce the internal revenue laws and finance the debtFed – monopy y ol on money creation

Finance Department @ Jan
Main messag 

e: can’t have it both w

Policymakers can’t both extend maturity to obtain debt mana

objectives and take maturity out of the market to support objectives and take maturity out of the market to support 

demand objectives.

But... debt management is a quantitative exercise. Even if t

qualitative arguments are compelling, implementation by policymakers is quantitative.

And... institutional arrangements reflect many priorities. CoAnd... institutional arrangements reflect many priorities. Co

seems less controversial, but mandates and instruments fragmented by design. 

Finance Department @ Jan