Managing the Public Debt

Abstract

Debt management includes decisions about the composition and terms, but not about the amount, of the public debt. The heart of the countercyclical debt management theory is that short-term obligations provide liquidity and in duce spending while long-term obligations do the reverse. The effects of such management are indirect, uncertain, and weak and may be redundant if monetary policy is adequate. Debt management is less flexible than monetary policy, and its effects may persist after a change of policy is required and thus become an obstacle to the effectiveness of monetary policy. In a reces sion, short-term financing tends to raise short-term interest rates and may delay a resumption of spending by offering at tractive returns on funds. In recent years the average maturity of the debt has been declining, thus increasing the possibilities of inflation. The only two recent occasions on which the debt was lengthened moderately were in periods of recession; appar ently the lengthening did not delay recovery. The potentiali ties of countercyclical debt management have been overempha sized in recent years, especially if an effective monetary policy is assumed. At least one competent student of the problem advocates substituting cost for economic stabilization as the proper criterion for debt management.