Empirical and Theoretical Evidence for the Strategic Use of Debt Management as an Active Policy Instrument

This dissertation provides theoretical and empirical motivation for the strategic use of federal debt management as an instrument of fiscal and monetary policy. It advances the sparse theoretical literature in this area on at least two fronts. First, the source of conflict between existing practical and theoretical views on debt management is exposed and examined. Frequently cited objectives are: (i) minimization of interest costs on government debt; (ii) macroeconomic stabilization and (iii) neutralization or minimization of the distortionary effects of debt financing on financial markets. The conflict between (i) and (ii) is shown to be irreconcilable, given reasonable assumptions about the shape of the Treasury yield curve. Optimal counter-cyclical debt management strategies result in the maximization of interest costs. Specifically, the Treasury conducts stabilization policy by adjusting the maturity structure of the debt, thereby altering the liquidity structure of investor portfolios. The Treasury will increase (decrease) liquidity in recessionary (inflationary) periods by shortening (lengthening) the average time to maturity of the debt. Second, the interaction between Treasury debt management strategies and the monetary policy authority vested in the Federal Reserve (or fiscal authority of Congress) can be modelled as a non-cooperative game with multiple Pareto-rankable Nash equilibria. Several game-theoretic models are studied, with the strategies adopted by the Treasury and Federal Reserve determining a recessionary, inflationary, or neutral outcome for the economy. Third, the institutional arrangements between the Federal Reserve, Treasury, and primary dealer community are investigated. Analysis of these arrangements suggests that the competitive advantages associated with primary dealer status may foster non-competitiveness or collusion in the dealer community and discourage financial innovation in government securities markets.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Hartwig, Robert Paul

Contributors dc:contributor

• Bryan, W.,

• Economics, General
• Economics, Commerce-Business
• Economics, Finance
• Political Science, General

Identifier

(UMI)AAI9314876

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/72417