Public Debt Sustainability and Management in a Compound Option Framework

Author/Editor: Chan-Lau, Jorge ; Santos, Andre
Publication Date: January 01, 2010
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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 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.
Series: Working Paper No. 10/2
Frequency: Monthly
Subject(s): Debt management | Asset management | Credit risk | Debt sustainability | Economic models | Group of Twenty | Public debt | Risk management

Author's Keyword(s): Asset-liability management | debt management | default risk | Australia
Publication Date: January 01, 2010
ISBN/ISSN: 9781451961676 Format: Paper
Stock No: WPIEA2010002
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