Public Debt Sustainability and Management in a Compound Option Framework |
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Author:
| Chan-Lau, Jorge A. Santos, Andre |
Series title: | IMF Working Papers |
ISBN: | 978-1-4519-1851-9 |
Publication Date: | Jan 2010 |
Publisher: | International Monetary Fund
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Book Format: | Ebook |
List Price: | Contact Supplier contact
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Book Description:
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This paper introduces the Asset and Liability Management (ALM) compound option model. The model builds on the observation that the public sector net worth in a multi-period setting corresponds to the value of an option on an option on total government assets. Hence, the ALM compound option model is better suited for analyzing and evaluating the risk profile of public debt than existing one-period models, and is especially useful for analyzing the soundness of exit strategies from the...
More DescriptionThis paper introduces the Asset and Liability Management (ALM) compound option model. The model builds on the observation that the public sector net worth in a multi-period setting corresponds to the value of an option on an option on total government assets. Hence, the ALM compound option model is better suited for analyzing and evaluating the risk profile of public debt than existing one-period models, and is especially useful for analyzing the soundness of exit strategies from the large fiscal expansions undertaken by G-20 countries in the wake of the recent financial crisis. As an illustration, the model is used to analyze the risk profile and sustainability of Australia's public debt under different policies.