The World Bank Research Observer Advance Access originally published online on August 4, 2005
The World Bank Research Observer 2005 20(2):259-281; doi:10.1093/wbro/lki006
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Public Debt Management and Macroeconomic Stability: An Overview
Peter J. Montiel is Fred C. Green Third Century Professor of Political Economy at Williams College; his email address is pmontiel{at}williams.edu.
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.
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