Public Debt Management and

Transcription

1 Public Debt Management and Monetary Policy Philip Turner* Debt Management Facility (DMF) Stakeholders Forum 2011 Managing debt: lessons learnt and emerging issues Session 6: Domestic debt market development Berne, Thursday 9 June 2011 * philip.turner@bis.org. This reflects my own views, not necessarily those of the BIS. It draws on Fiscal dominance and the long-term interest rate. Financial Markets Group, London School of Economics. Special Paper No 199. May. 1 Main points Economic development helped by good public debt management and a credible central bank Better links between debt management and monetary policy become stronger in periods of macroeconomic or financial system difficulty Currently responsibility for these 2 policies is divided: Central Bank overnight rate Treasury, DMOs maturity of govt debt Mandates of govt debt managers unintentionally make their actions endogenous to macroeconomic policy Therefore need a clear policy framework for all official actions (including Quantitative Easing by CBs) that affect the maturity of govt debt a complex policy challenge 2 1

2 The industrial revolution Niall Ferguson in The Cash Nexus said quality of debt management is key for economic development fiscal explanation for Britain s ultimate triumph over France was [that] National Debt funded (long-term) and transparently managed (especially after the advent of the consol [and] the Bank of England guaranteed convertibility into gold which enabled Britain to sustain a much larger debt/gdp ratio than France. 3 World Bank analysis of public debt management Asset and liability framework Wheeler, Andersen But developing a macroeconomic framework harder Tobin s equivalence no neat demarcation from monetary policy CB purchase of govt bonds in 2007-xx financial crisis blurred separation from monetary policy General macroeconomic models Togo Specific circumstances of macroeconomic or financial sector difficulty the focus of this note 4 2

3 1. New fiscal dominance? Massive increase in govt debt/gdp ratios which will not stabilise before 2016 will have lasting effects on the size and the composition of private balance sheets i. Economic theory provides no agreed view on impact on LT rates a) Ricardian world no impact on the LT RoI b) Fiscal dominance RoI low near-term but then higher c) Woodford fiscal expectations inconsistent with stable prices even with the CB following a Taylor-rule d) Monetary dominance RoI high near-term but then low Great uncertainty about impact of govt debt on future inflation rates and on real interest rates 5 2. Imperfect asset substitutability across maturities With perfect certainty about future ST rates, debt of different terms perfect substitutes. Changes in policy rate therefore feed through the yield curve Uncertainty about future interest rates will make debt of different terms imperfect substitutes. Therefore, policies that alter the ST/LT mix of govt debt outstanding become more effective CB purchases of bonds become more effective exactly when classic monetary policy works less well 6 3

4 the interest rate conundrum of Greenspan In principle, this could have been countered by longer maturity debt issuance by the Treasury or by Fed sales of govt bonds But practical effectiveness may have been limited by the high degree of interest rate predictability at that time? Perhaps but this predictability was itself nurtured by the Fed in its measured pace of increasing rates. This encouraged banks to take leveraged positions in interest rate markets, keeping LT rates low Key implication: the degree of asset substitutability will not be constant over time Policymakers may find it hard to quantify the changes in the uncertainty of interest rate expectations and in the ability of banks to take duration exposures. Difficult to assess underlying asset substitutability 7 3. The long-term interest rate and financial stability Another complication: LT rate should not be manipulated without taking account of the implications for financial stability Economic theory provides no clear guidance about optimal degree of maturity transformation or about who should do it Keynes et al public sector should adapt to shifts in private sector s willingness to assume maturity risks Major issue structure of interest rates creates incentives for maturity exposures of banks and others. 8 4

5 4. Macroeconomics of CB operations in govt debt markets Keynes in Treatise on Money: Open market operations to the point of saturation [bringing down] the long-term rate of interest to the limiting point Reinforced in The General Theory: Central banks always too nervous about buying long-term paper Tobin, Friedman et al developed models based on portfolio rebalancing: - Domestic rebalancing LT rate of interest falls - Shift to foreign assets Exchange rate falls Both effects stimulate aggregate demand. Controversy is about: - Magnitudes of such rebalancing effects which will vary over time and across countries. - Circumstances when international rebalancing dominates (beggarthy-neighbour dimension) 9 5. History of CB operations in govt debt markets i. United Kingdom: policy debates about the LT rate National Debt Enquiry (1945): Governments should not fetter themselves to a counter-liquidity preference. In 1950s, policy objective of holding down LT rates even as growth strengthened Radcliffe Report. Rejected HM Treasury view that bond sales should not seek to influence long-term interest rates The management of the National Debt [is] an instrument of single potency in influencing the structure of interest rates the monetary authorities must exercise a positive policy about interest rates, long as well as short. ii. United States Constraint of 4¼ % ceiling on rate US Treasury could pay on long-term bonds Huge swings in issuance policy over the past 30 years 10 5

6 20 Graph Maturity of US government bonds Average maturity of issuance 1,2 Average maturity of marketable debt outstanding 2 Fed funds rate (lhs) One-year moving average; shown at the end. Source: Datastream; US Treasury. 2 In months. 3 In per cent. 11 A simple regression How have swings in the average maturity of debt been related to macroeconomic policies? AVMAT = *D *R + 78*DEF%GDP ( 1) (4.1) (2.6) (4.0) (3.6) Adj R 2 = 0.47; F = 7.3; DW = 0.91; t statistics given in parentheses Period of observation: 1982 to 2010 (annual data) AVMAT = Average maturity of bonds outstanding R = Federal funds rate DEF%GDP = Federal deficit as % of GDP D = Dummy = 1 for

7 6. Macroeconomic policy focus of govt debt management How should we think of this endogeneity with respect to macroeconomic developments? In theory mandate to debt manager could Incorporate each year a new maturity objective set by the Treasury according to current macroeconomic objectives Be defined to be exogenous with respect to macroeconomic developments In practice, it has a mandate to minimise debt servicing costs in some way and this makes its actions endogenous with respect to macroeconomic and monetary developments This endogeneity is time-variant and opaque The maturity of debt is a plausible instrument of macroeconomic policy government has greater latitude to borrow short term. It does not need to worry about refinancing risks as much as a private borrower because it can tax and issue money Mandates, accountability and policy consistency Operational conflicts could be avoided by following two separability principles : CBs to operate only in the markets for bills, not for long-dated govt debt Govt debt management should be guided by cost-minimisation mandates subject to risk constraints These principles had advantages: made each institution accountable for distinct mandates provided some insulation from short-term political pressures a predictable policy framework should stabilise expectations 14 7

8 Assessing Quantitative Easing (QE) by CBs CB purchases of govt bonds have undermined this separation between CB policies and Treasury debt management Treasury could achieve same results by issuing fewer LT bonds and more ST bills Paradox is that the US Treasury has been lengthening the average maturity of debt in a major way while aim of QE which is to shorten the maturity of bonds held by the public Reminiscent of the famous Operation Twist in the 1960s? Govt balance sheet larger but CB balance sheet often more elastic Need to assess the consolidated balance sheet of the Treasury and the CB. So updated 1st table of Tobin s 1963 paper 15 Composition of marketable US Federal government debt held by the public $ billion End of fiscal year (Sept) Marketable securities (<or = 1 year) (> 1 year) Currency & Federal Reserve obligations Total Money, Federal Reserve obligations and short-term debt (a) (b) (c) (d) = (a+c) % d 1st 2 years of crisis % % 3rd year of crisis % Using Monthly Statement of the Public Debt of the United States; Federal Reserve Table H.4.1. Sources: This is an update of that in Tobin (1963) using US Treasury Bulletin; Federal Reserve Flow-of-Funds. 16 8

9 What is happening now? 3 November 2010 Fed announced special programme to buy $ billion longer-term security 2 November 2010 Treasury Borrowing Advisory Committee: The Fed and the Treasury are independent institutions Treasury should adhere to its mandate of assuming the lowest cost of borrowing over time, regardless of the Fed s monetary policy A couple of members noted that the Fed s behavior was probably transitory The policy of lengthening maturity reaffirmed in the March 2011 minutes. 17 Conclusion CBs may need to act in LT debt market, not just ST bills market in conditions of heightened uncertainty about future interest rates and large govt debt has raised uncertainty t about inflation and real interest t rates Very little known about the magnitudes. Although studies find QE has reduced LT RoI, these studies fail to take account of contemporaneous changes in govt debt management policies Policy framework needs to ensure consistency of all policies which alter maturity structure of govt debt and communicate what CBs and govts intend to do 18 9