Introduction

What maturity structure should the Treasury choose for public debt? When is it advisable to issue indexed bonds? And, in general, is there an ‘optimal menu’ of debt instruments to be issued by governments? These questions reflect everyday concerns of Central Bankers and Treasury Ministers. Still, until lately economists have provided little help in answering them. The last systematic treatment of the choice of the maturity structure dates back to Tobin's (1963) essay on debt management. Although more work has been done on the choice of debt instruments (chiefly on indexed bonds), Fischer (1983) still concluded that ‘there is as yet no satisfactory theory of what types of assets governments should issue’ (p. 243).

Recently, however, research interest in this area has been revived by the game-theoretic view of the interaction between government and private sector. The insight is that debt-management issues – such as the choice of maturity structure or the decision on debt indexation – can be seen as a way of altering the set of incentives faced by the government and thus the strategies that the private sector expects the government to play.

For instance, Lucas and Stokey (1983) and Persson et al. (1984, 1987) have shown that a government can choose the maturity structure of debt so as to tie the hands of its successors, eliminating any future incentive to depart from the policy it has optimally chosen (i.e. ensuring time-consistency).