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Cambridge Finance Workshop - Rigas Oikonomou

Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
When Jun 13, 2019
from 12:30 PM to 01:30 PM
Where Room W4.03 Cambridge Judge Business School
Contact Name
Contact Phone 01223768129
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Rigas Oikonomou (Universite Catholique de Louvain)

Title: Union Debt Management, by J. Equiza-Gonin, E. Faraglia  and R. Oikonomou



We study the role of government debt maturity in currency unions to identify whether debt
management can help governments hedge their budgets against spending shocks. We first use
a novel and detailed dataset of debt portfolios of five Euro Area countries to run a battery
of VARs, estimating the responses of holding period returns to fiscal shocks. We find that
government portfolios, which in our sample comprise mainly of nominal assets, have not been effective in absorbing idiosyncratic fiscal risks, whereas they have been very effective in absorbing aggregate risks. To shed light on this finding, as well as to investigate what types of debt are optimal in a currency area in the presence of both aggregate and idiosyncratic shocks, we setup a formal model of optimal debt management with two countries, benevolent governments and distortionary taxes. Our key finding is that governments should focus on issuing inflation indexed long term debt since this allows them to take full advantage of fiscal hedging. 

When we look at the data we find a stark increase in the issuance of real long term debt since the beginning of the Euro in many of the countries in our sample, which our model explains as an optimal response of governments to the introduction of the common currency.

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