0000000000285426
AUTHOR
Angel Gavilan
Risk Management for Sovereign Debt Financing with Sustainability Conditions
We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for sustainability. We quantify the minimum refinancing risk and the maximum rate of debt reduction that a sovereign c…
Risk Management for Sustainable Sovereign Debt Financing
We model sovereign debt sustainability with optimal financing decisions under macroeconomic, financial, and fiscal uncertainty, with endogenous risk and term premia. Using a coherent risk measure we trade-off debt stock and flow risks subject to sustainability constraints. We optimize static and dynamic financing strategies and demonstrate economically significant savings from optimal financing compared with simple rules and consols, and find that optimizing the trade-offs can be critical for sustainability. The model quantifies minimum refinancing risk and maximum rate of debt reduction that a sovereign can achieve given its economic fundamentals, and an extension identifies optimal timing…