Public debt management and the interaction between fiscal and monetary policies

PurposeThis paper aims to investigate the existing relations between the management of public bonds on the dynamics of debt, term structure of interest rates and economic cycle, through a dynamic stochastic general equilibrium model (DSGE), which was estimated through Bayesian inference techniques using data from Brazil.Design/methodology/approachThe model developed was used to investigate the effects of the public debt average maturity management when the economy faces a monetary policy shock. For this, three management scenarios are evaluated, including Brazilian securities average term.FindingsContrary to what might be inferred from DSGE models that limited the analysis of the debt term by imposing only one-period bonds, a contractionary monetary policy shock does not necessarily cause public debt to increase significantly. Debt term structure plays a crucial role in this result since the government does not need to roll the debt over at higher costs when the debt term profile is longer, reducing the debt service costs and then the impact on the overall debt.Originality/valueDespite the relevance of this theme and its implications for the dynamics of the economy, there is still a gap to be filled in the literature when using DSGE models, since most part of the work that used this methodology limited the analysis of the debt term by imposing that government issues only one-period bonds. This paper differs from the others insofar as it promotes an investigation focused on the role played by debt maturity management on the performance of the contractionary monetary policy. This approach can generate a better understanding of debt management policy and its interaction with fiscal and monetary policies.

Central Bank Credibility During COVID-19: Evidence from Japan

Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.

The term structure of economic management rate under the parameter analysis of the estimation model based on common differential equation

To reflect the country's economic growth, inflation and the implementation of monetary policies. Based on the monthly data of national debt yield from January 2015 to December 2019, these data are divided into 1 year to 30 years according to the maturity period, and the principal component analysis of the term structure of interest rate from 2012 to 2017 shows that the factors affecting the change of term structure of interest rate include level factor, skew factor and curve factor. The variance contribution rates of these factors to the variation of interest rate term structure curve are 82.2002%, 16.9948% and 0.6283% respectively. The horizontal factor represents the position of the term structure of interest rate, the skew factor represents the degree of skew of the term structure of interest rate, and the curve factor determines the interest rate.

MODELING LIFETIME EXPECTED CREDIT LOSSES ON BANK LOANS

The guidelines of various Accounting Standards require every financial institution to measure lifetime expected credit losses (LECLs) on every instrument, and to determine at each reporting date if there has been a significant increase in credit risk since its inception. This paper models LECLs on bank loans given to a firm that has promised to repay debt at multiple points over the lifetime of the contract. The LECL can be written as a sum of ECLs (estimated at reporting date) incurred at debt repayment times. The ECL at any debt repayment time can be written as a product of the probability of default (PD), the expected value of loss given default and the exposure at default. We derive a stochastic dynamical equation for the value of the firm’s asset by incorporating the dynamics of the factors. Also, we show how the LECL and the term structure of the PD can be estimated by solving a Black–Scholes–Merton like partial differential equation. As an illustration, we present the numerical results for the various credit loss indicators of a fictitious firm when the dynamics of the short-term interest rate is characterized by a Cox–Ingersoll–Ross mean-reverting process.