G Hanson Joshua S Rudolph amp Lawrence H Summers Government Debt Management at the Zero Lower Bound 2014 Roundtable on Treasury Markets And Debt Management Quantify Fed vs Treasury conflict in QE era ID: 1029005
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1. Robin Greenwood, Samuel G. Hanson, Joshua S. Rudolph, & Lawrence H. SummersGovernment Debt Management at the Zero Lower Bound 2014 Roundtable on Treasury MarketsAnd Debt Management
2. Quantify Fed vs. Treasury conflict in QE eraFed vs. Treasury in historical perspectiveA modern framework for debt managementWays to resolve Fed vs. Treasury conflictOur Paper
3. QE3QE1QE2Twist15.6%10-year duration equivalents, Change since Dec. 31, 2007(% of GDP)The Fed’s Quantitative Easing (QE) policies have reduced the net supply of long-term securities.Pulling in Opposite Directions
4. QE3QE1QE2Twist5.6%10-year duration equivalents, Change since Dec. 31, 2007(% of GDP)Meanwhile the Treasury was doing the opposite, extending the average maturity of its borrowings.Pulling in Opposite Directions
5. QE3QE1QE2TwistNet Impact: 10.1%10-year duration equivalents, Change since Dec. 31, 2007(% of GDP)Pulling in Opposite Directions
6. 10-year duration equivalents, Change since Dec. 31, 2007(% of GDP)Pulling in Opposite Directions
7. Before 2008, the Fed’s balance sheet was far smaller. As a result, the Fed had little impact on the maturity structure of the government’s consolidated debts.Fed vs. Treasury Historically
8. Shorter-termLonger-term Low cost financingLimit fiscal riskTraditional Debt ManagementTreasury’s traditional approach to determining the appropriate maturity of the debt traded off a desire to achieve low cost financing against the desire to limit fiscal risk.
9. Traditional Debt ManagementIssuing short-term is “cheaper” because it allows Treasury to capture the “liquidity premium” on T-bills and to conserve on the “term premium” investors demand to hold long bonds.Liquidity premium on short-term T-bills, Basis points
10. Traditional Debt ManagementTerm Premium on 10-Year Zero-Coupon Treasuries (1990 to 2014)
11. Traditional Debt ManagementWhat is fiscal risk?Refinancing riskIf the government issues short-term, it is exposed to increases in interest ratesIf the government issues long-term, it ‘locks in’ the cost of capitalRollover riskFailed auctionSelf-fulfilling bank run
12. Shorter-termLonger-term Low cost financing Limit fiscal riskTraditional Debt ManagementThe desire to limit fiscal risk looms larger when the overall debt burden rises.
13. Traditional Debt ManagementThus, Treasury has historically tended to extend the average maturity of the debt when debt-to-GDP rises. Much like the Treasury is doing today.
14. Actual Path of DeficitsDeficits in Counterfactual Casein which Treasury rolled over 3-mo BillsQuantifying Fiscal risk: A CounterfactualWe argue that the “fiscal risk” generated by issuing short-term debt is less important than traditionally thought.
15. Shorter-termLonger-term Low cost financingLimit fiscal riskTraditional Debt Management
16. Shorter-termLonger-term Low costLimit fiscal riskModern Debt ManagementModern debt management recognizes that the maturity of government debt may also be a valuable tool for managing aggregate demand and promoting financial stability. Aggregate demandFinancial stability
17. Shorter-termLonger-term Low costLimit fiscal riskDebt Management Conflicts Aggregate demandFinancial stabilityFedFedTreasuryTreasuryObjectives of modern debt management have been delegated to Treasury and Fed, which assign different policy weights to potentially conflicting goals
18. Outside of the zero-lower-bound, Fed sterilization of Treasury debt management is imperfect workaroundFed gets last word using short rateBut sterilization no longer possible at the ZLBExpansionary monetary policy at ZLBExtend average duration to mitigate fiscal risk (Treasury)Shorten average duration to bolster aggregate demand (Fed)Fed and Treasury in direct conflict over objectivesIf all weight on Fed’s objective function, then Fed can presumably do more QERealistically, dollar amount of QE limited by political considerationsDebt Management Conflicts
19. Treasury and Fed release annual joint statement on combined public debt management strategyForces each agency to internalize other’s objectivesFed charged with routine tactical adjustments because of its expertise in open-market operationsOur proposal is NOT in conflict in any way with Fed independence, if anything it seeks to bolster itOur proposal similar in nature to the cooperation between UK DMO and BOE starting in 2009Mervyn King “If the facility were to be used to purchase gilts, it would be important that the Government’s debt management policy remain consistent with the aims of monetary policy….I should be grateful if you could confirm that this will be the case.”Better solution