The coordination of policy objectives, instruments, and institutional and operational arrangements of public debt and monetary management assumes particular significance in the process of financial sector reform and stabilization of economies in transition.1 In market economies, such coordination can be achieved through either (1) the sharing of common objectives and pursuit of joint actions to achieve those objectives or (2) the work of market forces in cases where there is strict institutional separation of objectives, functions, and instruments. In the latter case, coordination is achieved with the central bank exercising operational autonomy in designing and implementing monetary policy, and the monetary and fiscal authorities operating in different segments of well-developed financial markets, supported by a separation of debt and monetary instruments. In either case, arrangements exist for the sharing of needed information and of responsibilities to support the day-to-day execution of monetary and debt policy and the effective pursuit of stabilization goals.
Several legislative provisions govern the Central Bank of” Ireland, the National Treasury Management Agency, and exchange rate policy. The central bank is an independent body, by statute, required by Section 6 of the 1942 Act to take “such steps as the Board may from time to time deem appropriate and advise toward safeguarding the integrity of the currency and ensuring that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole.” The Minister for Finance has the power under the 1942 Act to request the governor or the board “to consult and advise him” on the central bank’s performance of its general functions and monetary policy in particular, and the board is required to comply with such a request. At the time of the writing, this power had never been exercised by the minister. The central bank is independent in the carrying out of its functions, including the formation and implementation of monetary policy.
The Swedish National Debt Office is a government agency responsible for issuing loans on behalf of the Swedish state and managing the state debt. The objective is to fulfill this target as cost-effectively as possible. The debt office borrows in three markets—the domestic money and bond market; the private market; and the Euromarket and foreign capital market.
This chapter describes the Spanish experience with liberalizing its financial system, reorienting its monetary and debt management policies toward the market, and developing deep and sophisticated money and government debt markets. It focuses on operational and institutional issues, in particular interrelations between monetary control and government debt management, with only passing references to policy objectives or general economic developments.
Typically, the major objectives of debt management policy are to raise the government’s gross borrowing requirements at minimum cost and at an acceptable level of interest rate risk. To achieve these objectives, debt managers need to make important decisions on the optimal structure of the outstanding stock of debt and the design and use of instruments that will determine the character of debt issuance and the composition of the stock over the longer term. Debt management policy can be categorized into tactical and strategic aspects. In a broad sense, tactical policy is aimed at managing the stock of debt by balancing debt service costs with exposures to changes in interest rates, while strategic policy is directed at minimizing costs by promoting more liquid and efficient government securities markets.
The total U.S. treasury debt amounted to $4.7 trillion on December 31, 1994, including $2.7 trillion of marketable securities held by private investors.1 The rest of the public debt consists of marketable treasury securities held by federal government accounts and the Federal Reserve System, nonmarketable treasury securities issued directly to U. S. government trust funds, and nonmarketable U. S. savings bonds and state and local government series securities.
A primary market trade takes place when securities are sold at issue directly to an investor. A secondary market enables the original investor to sell the securities before they reach maturity. Investors are more willing to buy securities in the primary market if they know that they can reduce their holdings at a time of their choosing by trading in the secondary market. As a result, a government is able to obtain better terms for securities that are traded in an efficient secondary market.
The possibility that the objectives and operations of fiscal policy, monetary policy, and public debt management may, at times, conflict requires that an efficient institutional framework for coordination and cooperation be in place to resolve differences. Otherwise, lack of coordination between these three policy areas may lead to macroeconomic imbalances and create major uncertainties for the private sector. Insofar as lack of coordination leads to higher-than-targeted inflation, policymakers will lose credibility. The institutional and operational arrangements for the coordination of these policy components have evolved significantly in the countries of the Organization for Economic Development and Cooperation (OECD), influenced by several factors. Central banks in the OECD area have become more autonomous in pursuing the goal of price stability, while fiscal policy has become more transparent and accountable. Debt managers also have become more autonomous in pursuing their objectives, and the objectives themselves have evolved to emphasize minimizing the costs of financing deficits over the long run, for specified levels of risks, in highly liquid market settings. The liberalization of financial markets, including government securities markets, has enabled the necessary coordination of monetary and fiscal authorities and debt managers to take place, in part, through policy adjustments in response to market signals.