Title |
Credibility, Public Debt and Foreign Exchange Intervention |
|---|---|
Area |
Emerging Markets |
Abstract |
This paper presents a generalized framework where a discretionary government finds it ex-post optimal to create a downward bias in the exchange rate in addition to the inflation bias of Barro-Gordon type. This dual credibility model helps explain the empirical pattern of public debt financing most recently reported by Falcetti and Missale (2000). Most notably, large and developed economies are predicted to have lower inflation and more conventional home currency bonds. The small and emerging economies, on the other hand, are expected to have relatively higher inflation and more foreign currency bonds. This suggests that a judicious use of a portfolio of home and foreign currency bonds may help economies that are in transition to independent central banking. |
Author(s) |
Chaudhury Mo - Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, Canada H3A 1G5. Tel: (514) 398-5927, Fax: (514) 398-3876, Email: chaudhur@management.mcgill.ca Ramagopal K. - Freddie Mac, 8200 Jones Branch Drive, Mailstop 486, McLean, VA, USA. E-mail: buchi_ramagopal@freddiemac.com |
Language |
English |
Date of Publication |
2001 |
URL |
http://web.management.mcgill.c[..] |
Number of pages |
38 |
Table of contents |
1. Introduction
2. Literature review 3. The classic inflation credibility problem 3.1 The macroeconomic environment 3.2 The debt financing setup 3.3 The bond pricing framework 3.4 The optimization framework for the government 3.5. The inflation credibility problem 3.6 The institutional solution 3.7 The foreign currency bond solution 3.8 The portfolio of bonds solution 4. The foreign exchange credibility problem 4.1 F-Bonds and the exchange rate credibility problem 4.2 Portfolio of bonds and the exchange rate credibility problem 4.3 The exchange rate credibility problem and the zero inflation policy 5. Optimal Bond Mix 6. Conclusion References |
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