Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet. We also use third-party cookies that help us analyze and understand how you use this website. As a result, their reserves with the central bank are reduced.
Uploader Agreement. In 2013, the CNB adopted an exchange rate commitment to intervene in the foreign exchange market.6 The central bank had weakened the Czech koruna (CZK) exchange rate to close to 27 CZK/EUR (from pre-intervention levels around 25.50 CZK/EUR) in order to avoid deflation. 15 Still, Norway is in a different position due to massive income from oil-related wealth funds. Still, the Czech Republic enjoys good credit standing and debt management remains prudent. 6 For more details on the exchange rate commitment, please refer to Bruha and Tonner (2018). In the Czech Republic, inflation-linked bonds are issued only within a retail program and make up a negligible part of the government debt portfolio. This environment led to negative bond yields. By closing this message, you are consenting to our use of cookies. Starting with the classic studies, Barro (1995) finds that debt management could be helpful in tax smoothing. Turning to the effects of fiscal policy expansion, (iii) it comes as no surprise that a hike in government expenditures increases the level of government debt; (iv) nevertheless, the effects might be even more pronounced in the Czech Republic, as we also find evidence for a partial crowding-out effect. Figure 5. Section 3 provides stylized facts about the development of government debt, its servicing, and the macroeconomic environment in the Czech Republic; Section 4 outlines the theoretical underpinnings of the applied framework and describes the data employed; Section 5 discusses the empirical results, and Section 6 concludes. Third, the loading matrices are fitted into a VAR framework with Ft being replaced by Ft: (3) LFtYt=tf(3), Fourth, the VAR model is estimated and identified recursively using the ordering specified in the next chapter. Privacy Policy 9.
However, real GDP growth subsequently slows down, possibly due to a crowding-out effect.11 Similar results for the Czech Republic were reported by Franta (2012) and Ambrisko, Babecky, Rysanek, and Valenta (2015). Some public debt management choices and large fiscal deficits endanger inflation management and the interest rate policy, and even the independence of the central bank. Between 2010 and 2016, the shares in the debt portfolio changed as follows: T-bills dropped from 8.9% to 0.3%, the share of government bonds with residual time to maturity of up to 1 year increased from 8% to 14.4%, and bonds with residual time to maturity between 1 and 3years increased from 17% to 29.6% (Figure 2, panel B). This calls for a forward-looking debt management strategy, i.e., a longer optimization horizon. Our research fits into the strand of literature focusing on policy coordination and potential conflicts among fiscal, monetary, and debt management policies, a topic that has been studied in various frameworks. The FAVAR model has several appealing properties that make it an ideal candidate for our empirical exercise. During boom period, the central bank sells more long-term government securities in the open market and purchases a corresponding amount of short-term government securities with the same amount of money. Togo argues that separation of debt management policy may reduce trade-offs among these three policy objectives and enhance the credibility and effectiveness of policy implementation. We explore the effects of fiscal and monetary policy shocks on key debt management variables and provide empirical evidence supporting the notion of a strict separation of economic policy from the debt management agenda. In practice, most governments keep very low interest rates on short-term securities and gradually increase the interest rates as the maturity period of the debt lengthens. The FAVAR model helps ensure that the estimated impulse responses are invariant with respect to extensions of the information set an issue that often plagues impulse response results. Our results largely support the separation of the individual economic policies. However, the repo rate does not change continuously, only by decree of the CNB Board of Governors. The stabilisation objective requires opposite policies. One of the main advantages of the FAVAR approach is that IRFs can be constructed for any variable in the information set. Franta (2012) estimates a vector autoregressive (VAR) model and identifies fiscal shocks using various approaches with Czech data. Interrelation and Coordination of Monetary and Fiscal Policies | Economics, 3 Main Objectives of Portfolio Management, Views on Monetary and Fiscal Policy (With Diagram), Keynesianism versus Monetarism: How Changes in Money Supply Affect the Economic Activity, Keynesian Theory of Employment: Introduction, Features, Summary and Criticisms, Keynes Principle of Effective Demand: Meaning, Determinants, Importance and Criticisms, Classical Theory of Employment: Assumptions, Equation Model and Criticisms, Classical Theory of Employment (Says Law): Assumptions, Equation & Criticisms. After 2012, government debt growth was significantly reduced due to a concomitant rise of the economy and wealth of economic agents.
Second, faster GDP growth decreases relative indebtedness as measured by the debt-to-GDP ratio. The only difference is a slightly slower reaction of the variables to the monetary policy shock for models with a larger number of factors.
Generally, a conflict between monetary policy and debt management may arise due to a shortage of independent policy instruments (Togo, 2007). Debt management leads to a number of problems which should be tackled in co-ordination with monetary and fiscal policy. Higher debt service costs are also reflected in increased debt interest payments. The fiscal policy VAR model based on Blanchard and Perotti (. Abbreviations stand for: CSO Czech Statistical Office, CNB Czech National Bank database ARAD, IMF International Monetary Fund database, ECB European Central Bank Statistical Data Warehouse. The cookie is used to store the user consent for the cookies in the category "Analytics". In the Czech Republic, numerous studies focus on fiscal discipline and debt sustainability, see e.g., Ambrisko et al. Note: The data are taken from the Czech Republic government debt management annual report 2018. Such actions influence the cost of unhedged foreign-currency-denominated debt. To find out how changes in the economic policy setting may influence the debt management-related set of variables, we use the factor-augmented vector autoregression model (FAVAR) introduced in Bernanke, Boivin, and Eliasz (2005). document.getElementById( "ak_js" ).setAttribute( "value", ( new Date() ).getTime() ); Terms of Service Privacy Policy Contact Us. Our findings echo the post-crisis environment of low or even negative interest rates, where many debt managers altered their portfolios structure in favor of short-term bonds. The government should exchange its maturing securities with hew long-term securities carrying low interest rates so that their interest cost is less in the future. Shows all time-series incorporated in the analysis.
For instance, an excessive proportion of short-term floating rate debt could significantly increase refinancing costs or even make refinancing impossible in extreme cases of weak debt management.
Fiscal transmission into the real economy alternative model specification, Figure 3D. Did you know that with a free Taylor & Francis Online account you can gain access to the following benefits? Fifth, confidence bands of the impulse response functions are constructed using a bootstrap-after-bootstrap technique proposed by Kilian (1998).
In Table 2A, we check the correlations of sub-groups of variables with the estimated factors, which we interpret by visual inspection. The Czech Republic is an interesting case for a study as the national debt manager took advantage of the low-interest environment between 2010 and 2017 and altered the debt portfolio structure in favor of short-term bonds. Monetary restriction, fiscal expansion, and debt management. The net foreign-currency exposure of government debt with impact on government debt service was denominated solely in EUR at the end of 2016. For the purpose of comprehensive evaluation of debt management, the World Bank in cooperation with other relevant institutions developed the Debt Management Performance Assessment (DeMPA) methodology.7. In 2001, the IMF and World Bank published a set of guidelines on public debt management for policymakers, which were later revised in response to financial sector regulatory changes and macroeconomic policy developments (IMF and WB, 2014). Registered in England & Wales No. Copyright 10. Poor fiscal policy may produce high deficits that need to be financed by new debt. 
Whereas the monetary policy is supposed to act countercyclically, the fiscal policy is often found to behave procyclically (Alesina, Campante, & Tabellini, 2008). Bianchi and Melosi (2019) claims that monetary and fiscal policies are not completely independent and there is a need for their coordination. Most of the estimated median IRFs from the models with 5 and 7 factors lie inside the 90% confidence interval of the FAVAR model with 3 factors. To see if the model captures relevant theoretical responses of the main macroeconomic variables to the two economic policy shocks, we show the response of real GDP, unemployment rate, prices, real effective exchange rate, gross capital formation, and tax incomes (Figure 3). Moreover, any holding of public debt by the central bank correspondingly increases the cash holdings of commercial banks. The government debt management should not be neglected in this process. This cookie is set by GDPR Cookie Consent plugin. The remaining factors are mostly insignificant in terms of correlations, which justifies estimating the FAVAR model with just the three latent factors described above.
In this application, we assume that the only observable variable is the policy instrument, i.e., the PRIBOR 3M Rt, so that Yt=Rt. This cookie is set by GDPR Cookie Consent plugin. First of all, prediction of interest expenditure on debt service should be provided and relevant risks should be evaluated, including refinancing, interest rate, and currency risk. The estimates are based on contemporaneous covariances only and, as such, do not exploit the potential information contained in the leading-lagging relations between the variables. Debt management performance should be regularly evaluated, as is done by the Czech Ministry of Finance in annual reports. Ft is obtained as the part of the space covered by Ct=Ft,Yt that is not covered by Yt, that is, by removing Yt from the space covered by the principal components. 3099067 In particular, we are interested in finding out if the infamous fiscal and monetary policy puzzles emerge when using the small three-variable VAR model. A large size of public debt is likely to siphon off funds from the capital market. Fry and Pagan (2011) provide a critical review of sign restrictions as an identification method for structural shocks. According to Das, Papapioannou, Pedras, Ahmed, and Surti (2010), debt management influences financial stability through five channels stock of debt, debt profile, investor base, debt market structure, and institutional aspects. On the other hand, debt management requires the shortening of the average maturity structure of the outstanding public debt through the sale of short-term government securities to replace them by purchasing long-term government securities during a recession. The need for immediate bond issues beyond the longer-term plan captured in the fiscal outlook for the next 3years may increase the cost of debt financing and may lead to repayment issues. Similarly, Eickmeier and Hofmann (2013) apply a FAVAR model to US data with the aim of analyzing monetary transmission via private sector balance sheets, credit risk spreads, and house prices and of exploring the role of monetary policy in the housing and credit boom prior to the global financial crisis. Monetary transmission into the real economy alternative model specifications, Figure 2D. The restriction of a small number of latent factors is consistent with standard dynamic equilibrium macroeconomic theories (Stock & Watson, 2016). 13 Figure 2C in the Appendix shows the average government bond yields in the Eurozone. The solid horizontal line represents the Czech average term-to-maturity as of end-2016. Nevertheless, the FAVAR estimation itself is carried out using non-standardized variables in Yt. The responses are depicted in Figure 5. In general, one might assume that increase in indebtedness (higher debt-to-GDP ratio) should have a positive impact on capital accumulation in the economy and should be correlated with deepening of the financial market. The main policy tool of the CNB is a two-week repo rate. We specify an M1 vector of macroeconomic time series Yt and a K1 vector of unobserved factors Ft. We assume that the joint dynamics of Yt,Ft are given by the following equation: (1) FtYt=LFt1Yt1+t(1), where L is a lag polynomial and t is an error term with zero mean and covariance matrix Q. Prior to estimation, the time series are seasonally adjusted using the X-12 Autoregressive Integrated Moving Average (X-12-ARIMA) and transformed to assure stationarity of the time series using first differences of natural logarithms. 4 Faraglia, Marcet, and Scott (2010) in their search for a theory of debt management criticize the idea of complete market approach to debt management. However, as shown by Tuzcuoglu and Hoke (2016), different time spans might lead to different numbers of factors. In particular, we try estimating the model with 5 and 7 factors. This will reduce the liquidity preference and shift the LM curve to the right from LM to LM2 with a lower equilibrium level of interest rate OR2 and a higher income level OY2, as shown in Fig. This website uses cookies to improve your experience while you navigate through the website. Our model does not produce a price puzzle as is often the case with smaller VAR models. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. 3 The Medium-Term Debt Management Strategy (MTDS) framework assessment can be found in IMF (2017). By modelling the impact of economic policy measures on debt management dynamics in a data-rich environment, we can control for real economy development, changes in fiscal and monetary policy, financial sector development, and external influences. Several studies also refer to tax smoothing as one of the government goals that may affect the debt management (see Canzoneri et al., 2016; Faraglia, Marcet, & Scott, 2008). The rest of the blocks are classed as fast-moving, which are variables assumed to be highly sensitive to contemporaneous economic news or shocks. We gratefully acknowledge financial support from the Czech Science Foundation (GA16-22540S) and the SGS project at VSB-TUO (SP2020/110). In the Czech Republic, a department for the management of government debt and financial assets was established in 2005 under the Ministry of Finance, and the Czech National Bank (CNB) now acts as the market supervisor. The FAVAR model uses the advantages of a data-rich environment while remaining tractable in terms of the number of parameters to be estimated. Disclaimer 8. From the debt management policy standpoint, increasing government spending (in excess of government revenues) generates deficit, which is usually financed through bills and bonds and thus increases the size of the public debt. To avoid polluting the factor extraction process due to different scales of the various time series, all informational time series in vector Xt are standardized to have zero mean and unit variance. Lower company incomes reduce investment and gross capital formation declines. In this paper, we take advantage of the mutually-reinforcing interlinkages of these economic policies and study the impact of fiscal and monetary policy shocks on debt management in the Czech Republic. 4. Yet there is a shortage of studies focusing directly on government debt management. Together, they serve as the empirical representation of a game of chicken. Furthermore, we show that increasing government indebtedness could cater to some of the alternative (parallel) goals of debt management, such as deepening the countrys financial market and supporting government investment plans. The number of securities bought and sold by the Central bank is a monetary policy decision. To achieve inflation targets in the post-crisis period, central banks created an environment of low or even negative interest rates and applied various unconventional monetary policy tools, such as quantitative easing, which influences government bond yield curves (Corradin & Maddaloni, 2017; Ferdinandusse, Freier, & Ristiniemi, 2017; Schlepper, Riordan, Hofer, & Schrimpf, 2017). If the government adopts a deficit budgetary policy for debt retirement, it would be inflationary in nature which is again required to be controlled by an appropriate anti-inflationary monetary policy. These cookies will be stored in your browser only with your consent. They stress the need for domestic capital market development to better manage the foreign exchange risk of government debt. A contractionary monetary policy shock has the expected impact on real economic activity: real GDP declines, bottoming out after 5 quarters. Check the correlations of every single variable with the estimated factors. Generally, it is not required to perform any ex-ante categorization of data, but stacking data into sub-groups in accordance with the different classes of economic variables can benefit the clarity of our computational process. However, during the selection process, we must bear in mind the following limitations for the Czech Republic data: (i) relatively short length of time series available; (ii) extensive structural changes in the period of economic transition; and (iii) methodological instability of the time series. This could be a serious issue for the Czech Republic, as government spending on pensions jumped form CZK 222 bn. Finally, Ft is calculated as CtFt,YtbYt. Strategy and tactics in public debt management. This method gives rise to wide spreads between the short-term and long-term interest rates. An asterisk, *, next to the transformation code number denotes seasonally-adjusted variables using CENSUS X13. Debt management is often referred to the amount, composition and refunding of the national debt. Looking at recent data on the average term-to-maturity of outstanding government debt across multiple countries (Figure 2C), there are certain other countries (Hungary, Sweden) that took the same approach of lowering their average maturities; this has left them more susceptible to monetary and fiscal policy-like shocks in the long term. In contrast to the basic VAR model, the FAVAR model includes unobserved low-dimensional factors in the autoregression, reducing the information bias. The government may even directly cooperate with the debt manager in order to spread out the tax burden (which may be associated with tax reforms) into a longer time period. The response of the real effective exchange rate is rather ambiguous, with relatively wide confidence intervals. Note that the exchange rate appreciation following a contractionary monetary policy shock may suggest that some foreigncurrency debt can be issued as a hedge against interestrate risk affecting short-term debt. (2012), Bulir (2004), European Commision (2012), IMF (2013), Komarkova, Dingova, and Komarek (2013), or Dybczak and Melecky (2014). Equation (1) is a standard VAR model that can be interpreted as a reduced form of a linear rational-expectations model with both observed and unobserved variables. None of the above has a significant impact on our results. The macroeconomic effects of monetary policy shocks under fiscal rules constrained by public debt sustainability de B. Monetary policy, housing booms and financial (im)balances, Fiscal insurance and debt management in OECD economies, The dynamic effects of monetary policy: A structural factor model approach, Opening the black box: Structural factor models with large cross sections, Tracking monetary-fiscal interactions across time and space, Sign restrictions in structural vector autoregressions: A critical review, Fiscal-monetary-financial stability interactions in a data-rich environment, International Monetary Fund and the World Bank, Small-sample confidence intervals for impulse response functions, Commitment vs. discretion in the UK: An empirical investigation of the monetary and fiscal policy regime, Debt management in the Czech Republic (formation in the 1990s and the current state), Choosing the currency structure of foreign-currency debt: A review of policy approaches, Risk management of government debt in the Czech Republic, Identifying government spending shocks: Its all in the timing, The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks, Separation of debt and monetary management in India, Assessing monetary policy in the euro area: A factor-augmented VAR approach, Forecasting using principal components from a large number of predictors, Dynamic factor models, factor-augmented vector autoregressions, and structural vector autoregressions in macroeconomics, Note: The standard monetary policy VAR model consists of real GDP, the CPI index, and the PRIBOR 3M. Debt management may support government investment plans focused on large infrastructure projects, construction of nuclear power plants, and other government priorities that requires large-scale and long-running investments. We discuss below a few practical and important techniques: The most important objective of debt management is that the interest cost of the public debt to the government should be low so that the burden of servicing the debt should be the minimum to the taxpayers. Plagiarism Prevention 5. The only countries with lower average maturity in 2016 were Hungary and Norway.15 The relatively small savings from the issuance of short-term bonds may be canceled out (or even overcome) by higher debt service costs in the long term due to accumulating debt issues and increased refinancing and interest rate risks. Content Filtration 6. The IRFs show the response of selected variables to an identified shock and its propagation over time. EU fiscal stance vulnerability: Are the old members the gold members? The main fiscal policy variables are government revenue from taxes and total government expenditure, either of which may be used as a source of the innovation. Therefore, our model may be considered as a complement to the Asset Liability Management (ALM) approach applied by debt managers to achieve optimal debt composition. The government repays the debt by raising revenues from taxation. As part of our robustness exercise, we compare the outcomes of simple fiscal and monetary policy VAR models with the ones from a FAVAR model. This holds especially for the fiscal and debt management policies. The unfavorable economic environment is reflected in the decline of tax collection. This would reduce investment spending. 5 Regular publications by the Czech Ministry of Finance regarding debt management include Funding and Debt Management Strategy, Government Debt Management Annual Report, Debt Portfolio Management Quarterly Report, and Performance Evaluation of Primary Dealers; for details please see http://www.mfcr.cz/en/themes/state-debt/publications-and-presentations. The effects of the contractionary monetary policy and fiscal expansion shocks are presented in Figures 3 and 4 using impulse response functions (IRFs) over a time window of four years (16 quarters). The lower the interest rates on government securities, the smaller will be the transference of resources from the taxpayers to bond holders. This makes the retirement of public debt held by the central bank difficult. These cookies track visitors across websites and collect information to provide customized ads. This violates the standard theoretical assumption that a surprise increase in the short-term interest rate will lower price inflation. During the 20002012 period, Czech government debt exhibited an obvious upward trend, accompanied by rising debt interest payments. Terms of Service 7. They need to be separated politically in terms of their objectives and accountability, in line with the Tinbergen principle. The associated impulse response functions are available in Appendix D, Figures 1D, 2D, 3D and 4D. An increase in indebtedness did not lead to significant changes in taxation in the Czech Republic. We show that increasing government spending coupled with rise of the monetary policy rate (for instance, during an economic boom) could increase the risk that the government debt will have to be rolled over at unusually high cost if the economy slows down in the future. We may summarize the findings from the literature review as follows: Individual policies should be politically separated in terms of their objectives and accountability, in line with the Tinbergen principle, to provide an optimal policy mix. To broaden the scope, Dottori and Manna (2016) study strategy and tactics in debt management and argue in favor of a broader perspective of coordination that also includes financial stability. For instance, the narrative case-study approach of Romer and Romer (2010) and Ramey (2011) would be hard to implement, given the relative scarcity of episodes of exogenous shifts in fiscal policy (such as tax shocks and defense news shocks). The largest changes occurred in the segment with residual maturity of up to 3years. A surplus budget acts in a deflationary manner upon the money supply and bank reserves.
7 for a discussion of the risks encountered in the management of government debt). Figure 4. 
Techniques 4.
The positive correlations accumulated in the second factor correspond at most to credit- and financial sector-related variables. But, in actuality, it is related to the composition (the types of securities sold) and the refunding of the debt held by the public within a country. 11 The existence of a partial crowding-out effect of government spending is also visible from the response of private consumption (see Figure 1B in the Appendix). Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. In our application, we have used from 3 to 7 factors. In fact, politicians often use monetary contraction to justify a fiscal expansion.
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