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Buybacks of domestic debt in public debt management

By Silvia Marchesi

Abstract

In the model a fiscal stabilisation is announced under asymmetry of information between the government and the private investors. The government could be of two types: a dry type and a wet type, according to the amount of spending cuts it decides to make. Private investors may thus lack confidence in the stabilisation program and interest rates would be too high, reflecting this lack of credibility. A dry type which has to finance new spending may want to signal its resolution (type) in order to lower its interest costs and one way to do that would be to repurchase a fraction of the outstanding debt. The wet type could also decide to buyback some of its debt in order to pretend to be a dry type and to (possibly) lower its interest payments. It is showed that a critical amount of buyback exists such that the two types could be separated

Topics: HG, HJ
Publisher: University of Warwick, Department of Economics
Year: 2000
OAI identifier: oai:wrap.warwick.ac.uk:1605

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