Variable rate debt to insure the government budget against macroeconomic shocks

Fenz, Holler – Working Paper 1 – Juni 2017

Inspired by the fiscal insurance theory of public debt management we focus on the role of debt management in insuring the government budget against business cycle fluctuations. In particular we analyze the potential of inflation-indexed and short-term interest-rate-linked debt to hedge the Austrian government budget against macroeconomic demand, supply and monetary policy shocks. By employing a multi-country BVAR model for the Austrian and euro area economy over the period 1999 to 2016 we find that both instruments are able to hedge a substantial part of cyclical budget balance dynamics. The hedging potential of both instruments differs considerably when specific drivers of business cycle fluctuations are analyzed. In case of demand shocks both instruments have the potential to insure the government budget, while in case of supply shocks and monetary policy shocks this is only true for interest-rate-linked debt and inflation-indexed debt, respectively.

Publikationsjahr: 2017
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