Front Matter

Front Matter

International Monetary Fund
Published Date:
April 1997
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    Coordinating Public Debt and Monetary Management

    Institutional and Operational Arrangements


    V. Sundararajan, Peter Dattels, and

    Hans J. Blommestein

    International Monetary Fund

    © 1997 International Monetary Fund

    Cover design by IMF Graphics Section

    Library of Congress Cataloging-in-Publication Data

    Coordinating public debt and monetary management: institutional and operational arrangements/editors, V. Sundararajan, Peter Dattels, and Hans J. Blommestein.

    • p. cm.

    • Includes bibliographical references.

    • ISBN 9781557755551

    1. Debts, Public. 2. Monetary policy, 3. Debts, External. I. Sundararajan, Vasudevan. II. Dattels, Peter. III. Blommestein, H.J., 1950–.

    HJ8015.C66 1997




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    Institutional and operational arrangements for the coordination of monetary and public debt management play a key role in the development of government securities markets and in the adoption of indirect instruments of monetary management. The International Monetary Fund (IMF) has addressed these issues in its technical assistance work with member governments for many years.

    Over the past five years, however, the massive structural changes in the transition economies have greatly increased the demand for technical assistance in all areas of macroeconomic management, including monetary and public debt management and the development of government securities markets. In response to this challenge, and at the request of major central banks, the IMF has provided a comprehensive program of technical assistance in central banking and monetary and exchange management. This assistance program has been delivered with the support of several cooperating central banks and international institutions, including the Organization for Economic Cooperation and Development (OECD). As part of this cooperative effort, the IMF joined forces with the OECD, which has had many years of experience in public debt management issues among its member states, and jointly organized workshops on coordinating monetary and public debt management. These workshops were attended by senior officials from both the central banks and ministries of finance of the Baltic countries, Russia, and other countries of the former Soviet Union, and benefited from the presentations by experts from several central banks, ministries of finance, and debt offices of industrial countries.

    The purpose of these workshops was to highlight strategies for managing the public debt, developing government securities markets, and coordinating those activities with monetary management. In the context of financial liberalization and the transition to market-based financial management, the adoption of indirect instruments of monetary management and the development of government securities markets constitute a mutually reinforcing set of reforms. Implementation of these reforms is critical for the effective and efficient implementation of stabilization policies, but it requires appropriate institutional arrangements for the coordination of monetary and public debt management. This coordination process and related institutional issues were the underlying themes of the workshop papers, which have been edited and compiled into this volume.

    This book illustrates the close support and cooperation that the IMF has received from central banks and ministries of finance, as well as from the OECD. The IMF is pleased to publish the product of this joint IMFOECD endeavor. It offers policymakers a unique presentation of operational issues and practical arrangements for the coordination of monetary and public debt management, and of the institutional issues in developing government securities markets.

    Manuel Guitián


    Monetary and Exchange Affairs Department


    The editors are grateful to the contributing authors for their papers, and wish to tbank them for the patience, effort, and promptness in revising their initial lectures and producing, in many cases, expanded papers in order to highlight the themes of the book. Many of the papers were presented at the seminars of the Monetary and Exchange Affairs Department of the IMF and greatly benefited from comments received from the seminar participants. Some of the papers have been issued as IMF working papers. Special tbanks are due to Mr. Leite, whose earlier work in this field provided important background to many of the papers in this book, and to Mr. Balino, who reviewed many of the papers and simplified the task of the editors. The views expressed are those of the respective authors and not necessarily those of their respective institutions.

    Also to be tbanked are J.R. Morrison and Martha Bonilla of the External Relations Department, who provided editorial assistance throughout the production of this book, and Magally Bernal, Margaret J. Boesch, Lourdes Z. Horton, and Eleanor G. Wood who provided excellent secretarial assistance. In addition we would like to tbank Julio Prego of the Graphics Section and Alicia Etchebarne-Bourdin of the External Relations Department for composition.


    The following symbols have been used in this book:

    … to indicate that data are not available;

    — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

    – between years or months (e.g., 1995–96 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    / between years (for example, 1996/97) to indicate a fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.


    V. Sundararajan, Peter Dattels, and Hans F. Blommestein*

    Institutional and operational arrangements for the coordination of monetary and public debt management play a key role in macroeconomic stabilization and financial market development. These arrangements constitute critical components of central bank-government relations, and the development of these arrangements is one of the essential concomitant reforms supporting the transition to indirect instruments of monetary policy. Coordination of policies is crucial because the policy objectives of monetary authorities, fiscal authorities, and debt managers may conflict and may require the articulation of shared objectives. Efficient achievement of policy goals and coordinated actions to pursue shared objectives both require appropriate coordination of instruments of monetary and debt management in terms of their technical design. Instrument coordination facilitates market development during financial sector liberalization, supports market soundness, and fosters operational autonomy of debt and monetary managers in well-developed markets. In particular, the appropriate design and operating procedures of monetary policy can help develop government securities markets and, typically, form the foundation for the liquidity and efficient functioning of these markets. Finally, the effective conduct of monetary and debt management operations requires the coordination of information inputs between the monetary and fiscal authorities. A lack of coordination may lead to persistent macroeconomic imbalances, slow down progress toward stabilization and market development, and raise uncertainty for the private sector, increasing the cost of funding to the government. This book examines issues and practices in the coordination of monetary and public debt management, drawing on the experience of both developing and advanced market economies, and argues that appropriate design and management of institutional and operating arrangements are important, particularly in economies liberalizing their financial systems.

    The main issues and strategies for the coordination of public debt management and monetary control in both transition and market economies are surveyed in Part I. Several key findings emerge: (1) the exact scope and content of coordination vary across countries and over time, depending upon sociopolitical factors, efficiency considerations, policy objectives, and the stage of financial market development; (2) the early stages of financial market development require close coordination of both policy objectives and technical design and operation of monetary and debt instruments, in order to support the common objectives relating to stabilization and market development; (3) in contrast, in advanced market economies, coordination can normally be achieved through market forces supported by an institutional separation of objectives, functions, and instruments of monetary and debt management; in this case, the extent to which central bank autonomy and the pursuit of price stability require autonomy and transparency of debt management and fiscal operations is a key institutional issue; (4) the relative roles of monetary, fiscal, and debt management authorities vary widely in the areas of primary debt issuance, secondary market arrangements, procedures for credit, profit transfers from central bank to government, reserve money and government debt programming, and the related sharing of information on, and management of, government cash flows and market liquidity. Legal, administrative, and operational arrangements for the delineation and coordination of responsibilities in the above areas are broadly reviewed in Part I and taken up in greater detail in Parts II and III. The review underscores the contention that coordination arrangements strongly reflect the stage of market development and the degree of central bank autonomy.

    The functions of public debt management and the necessary components of a comprehensive framework for public debt management—hierarchy of objectives, range of instruments, institutions’ legal underpinnings, and information and supervisory systems—are reviewed in Part II from the perspective of elucidating arrangements for coordination and their relationship to the stage of market development. Several technical issues relating to the design and operation of instruments of monetary and debt management and to the organization of secondary markets are also discussed. It is shown that careful attention to technical design and to the operating procedures of debt instruments can support effective implementation of both monetary and debt management in the initial stages of transition. The efficient organization of government securities markets is a common objective binding the monetary and fiscal authorities, and the crucial role that the authorities can play in promoting an appropriate secondary market structure is also highlighted. Analysis draws on country experiences and on the literature on the microstructure of markets and auction systems.

    Part III presents case studies of selected country experiences in order to provide an in-depth discussion of important aspects of public debt and monetary management, and the evolution of institutional and operating arrangements for their coordination. Country experiences provide insights into the management of policy conflicts, the design of debt management policy, the relative effectiveness of alternative operating arrangements for debt and monetary management, the transition to market-based monetary and debt management, and the evolution of secondary markets.

    In economies in transition where financial markets are underdeveloped, monetary and debt management cannot be strictly separated, while economic stabilization and the development of financial markets are common objectives linking the monetary, fiscal, and debt management authorities. These shared objectives and the nascent state of financial markets raise special issues regarding the coordination of policy objectives and instruments, and the supporting institutional and operational arrangements for such coordination. In the early stage of financial market reform, debt instruments and primary market issuance are often used for monetary purposes, calling for much closer day-to-day collaboration between the monetary and fiscal authorities than would be the case with well-developed markets. In Chapter 1, V. Sundararajan and others expfore these issues, providing strategies for the successful implementation of monetary and debt management during transition. It is argued that the development of financial markets and of well-coordinated monetary and debt management procedures are mutually reinforcing processes. The adoption of market-based instruments of monetary and debt management—which initially requires arrangements for close coordination of objectives and instruments—expands opportunities for active liquidity management by the central bank, commercial banks, and the nonbanks and provides incentives for institutional development. In turn, the resulting increased depth and efficiency of money and government securities markets opens up additional opportunities to strengthen the instruments and coordination procedures of monetary and public debt policy. In the course of this interactive process, the depth of financial markets increases, the components of debt management evolve, and the scope of central bank autonomy strengthens so that details of coordination arrangements are transformed. In outlining these processes, this chapter also serves as a survey of related institutional considerations that are analyzed in greater depth in subsequent chapters.

    In economies at more advanced stages of financial sector reform, with fully liberalized and well-developed financial and government securities markets, increased scope exists for the independent implementation of monetary, fiscal, and debt management policies. In this case, the alignment of policy objectives is achieved through the work of market forces with financial market rates (interest rates, exchange rates, etc.) increasingly used as inputs into decision making. The independent pursuit of objectives of fiscal, monetary, and debt management policies is supported by institutional arrangements that separate the objectives and instruments of the central bank, ministry of finance, and debt management authorities (treasury or debt agency), respectively, and that make them accountable and independent to varying degrees. The characteristics of, and preconditions for, such arrangements for market-based coordination in OECD countries are surveyed by Hans Blommestein and Eva Thunholm in Chapter 2.

    Countries undergoing a transition from “captive sourcing” of government borrowing requirements (through various statutory liquidity or prudential requirements imposed on financial institutions) to “voluntary sourcing” (using market-based practices) need to build up supporting debt management functions. Placing those functions within a comprehensive framework for public debt management is important in achieving the objectives of debt and monetary management. In Chapter 3, Lars Kalderen identifies and discusses the functions that constitute public debt management and highlights the advantages and disadvantages of various possible institutional arrangements for the location of those functions.

    Notwithstanding a diversity of institutional arrangements for government debt management across countries, common components that constitute a comprehensive framework for government debt management can be identified. Montserrat Ferré Carracedo and Peter Dattels (Chapter 4) survey public debt management frameworks in selected countries, identifying and comparing the components that make up the framework in these countries. A range of tactics and strategies designed both to minimize debt-service costs and to support monetary control is revealed, illustrating a high degree of convergence in industrialized countries regarding the broad strategy for efficient debt management.

    In an indirect monetary policy framework, market-based monetary operations become the central bank’s main instrument. In the initial stages of financial reform, the selection of a financial instrument for those operations and the design of supporting arrangements to ensure the central bank’s operational autonomy when using the instrument are crucial issues. On the basis of theoretical arguments and the experience of a sample of countries that embarked on financial reforms, Marc Quintyn (Chapter 5) weighs the use of government securities as opposed to central bank securities as a monetary instrument.

    Selling techniques generally vary according to the type of instruments, the target markets, and the role that the securities play in monetary management: in this regard, treasury bills are generally sold by auction. Important choices have to be made in establishing an auction system for treasury bills from the point of view of coordination with monetary management, revenue maximization, the promotion of integrity and depth in the primary market, and the authorities’ other debt and monetary management goals. Carlo Cottarelli (Chapter 6) discusses the main issues that arise in the design of treasury bill auctions, including the type of auction (uniform or multiple bid format); access to, and bidders’ participation in, auctions; and managing the auction process.

    Efficient price discovery and liquid and deep government securities markets are common goals shared by the monetary, fiscal, and regulatory authorities. Achieving these goals depends on the existence of efficient market structures, according to the market microstructure literature and empirical evidence. Peter Dattels (Chapter 7) discusses alternative institutional structures for trading and price discovery and argues that authorities should play an active role in fostering the development of market structures for the secondary trading of government securities that are efficient and well suited to the specific circumstances of the markets. A variety of country examples illustrates different market structures and the approaches taken to encourage their development. Introducing a “primary dealer” system with special arrangements with dealers that support debt and monetary operations, as in many European countries, provides a classic example—an overview of these systems is provided. Transitional and supporting arrangements are sometimes needed, calling for a more direct role by the authorities, possibly acting as a dealer, establishing a discount house; as a market-maker, establishing a secondary market window; as an interdealer broker, establishing the infrastructure for brokering of transactions; or as a price stabilizer, participating in the market as an active auctioneer. The design and appropriate use of these arrangements are discussed.

    Basic conflicts arise in the coordination of debt and monetary management, especially in a country like Italy, with its long-standing budget deficits and a large and mounting public debt. When markets lack confidence in the future value of fixed rate debt, the proportion of floating rate or indexed debt that is repriced in each time period increases. Conflicts between the monetary and debt management authorities become acute when increases in short-term rates—as part of anti-inflationary policy—have virtually immediate repercussions on the cost of servicing the public debt, exacerbating the conflict between the goal of price stability and that of containing the burden of debt-service payments and the growth in the debt stock. Carlo Santini (Chapter 8) discusses the steps taken to manage this basic conflict and to improve the coordination and effectiveness of debt and monetary management in Italy.

    The fundamental link between government deficits and monetary conditions is the basis for the coordination of debt and monetary management, according to John Townend (Chapter 9), who discusses recent experience in the United Kingdom. Any excess of public sector expenditure over revenue implies, ex ante, an equivalent addition to private sector liquidity. The final economic impact will depend on how the deficit is financed, and, in particular, on whether the financing method offsets the increase in private sector liquidity. There emerges a strong case that integrating strategic decisions in these two areas improves macroeconomic management. In the United Kingdom, the Bank of England advises the treasury on these issues and conducts operations in the market for government securities on the treasury’s behalf. Experience has shown this to be a highly advantageous arrangement, in terms of both smooth coordination of policy and efficient deployment of staff resources.

    In a postscript to Chapter 9, the evolving new arrangements for public debt management in the United Kingdom are outlined. In response to domestic and international capital market developments, the U.K. Government has reviewed debt management procedures, and, in mid-1995, announced a new debt management framework. The new framework reorders the hierarchy of debt management objectives in order to emphasize cost minimization and reduces the emphasis on monetary policy and market stability considerations that were the dominant objectives in the past. It promotes predictability and transparency of debt issuance and proposes to foster greater liquidity in the market by developing an open repurchase market. The new arrangements imply considerable changes in the operating procedures used by the Bank of England and confirm the broad convergence of strategies in industrial countries in response to market developments.

    Ireland is an example of a country in which monetary and debt management policies and operations are separate. The sole objective of national debt policy is to minimize the long-term costs of servicing the debt. To pursue this policy effectively, and in an accountable way, the National Treasury Management Agency was established in 1990. Notwithstanding the formal separation of debt and monetary management, Michael Horgan (Chapter 10) highlights the importance of coordination arrangements for the sharing of information in order to support the day-to-day execution of monetary and debt policy. Furthermore, in some circumstances, there is a need for close policy coordination; for example, in times of currency crisis such as the European exchange rate mechanism (ERM) turmoil in 1992–93, meetings were held on a regular basis at the highest level of the department of finance, the central bank, and the agency in order to coordinate the implementation of debt and monetary policy.

    Creating a separate debt office does not, in and of itself, ensure an independent debt management policy. Staffan Crona (Chapter 11) discusses the initial use of domestic borrowing operations for monetary policy purposes in Sweden and the gradual evolution of the separation of debt and monetary management as markets developed. In order to develop a sound and balanced approach to debt management, establishing clear objectives and a clear organizational responsibility for the debt office was paramount, while the deregulation and development of the capital markets were prerequisites for the separation of public debt management from monetary policy.

    The Spanish experience highlights the gradual transition from a highly regulated and insulated financial system to market-based arrangements for debt and monetary management. Pedro Martínez Méndez (Chapter 12) shows that, even in a highly regulated environment, the central bank can take important steps in developing instruments and operating arrangements that foster market development, thereby setting the stage for more liberalized financial markets and more efficient arrangements for debt and monetary management.

    Achieving the goal of cost minimization at an acceptable level of interest rate risk exposure is discussed by Robin Miller (Chapter 13), in the case of Canada. Tactical management of the outstanding stock of debt and the strategic measures taken to improve market liquidity and efficiency of the government securities market are highlighted. The chapter discusses the evolving role of the Bank of Canada in debt management and demonstrates the high degree of planning and accountability needed in the debt management process.

    Jill Ouseley (Chapter 14) describes the benefits of a regular, predictable schedule of debt issuance, which has helped to reduce the U.S. Government’s borrowing costs by lessening the uncertainty surrounding treasury auctions. In addition, recent efforts to modernize the auction system have helped to increase the ease of access to the primary market and improve the treasury’s market surveillance capabilities, thereby improving the efficiency and integrity of the auction system. The U.S. experience with the uniform-price auction format for two- and five-year note auctions is analyzed, finding benefits from a broadening of the number of direct participants consistent with reducing the “winner’s curse” predicted by auction theory.

    Bjarne Skafte (Chapter 15) discusses the development of highly automated and sophisticated trading systems in Denmark and the role of transparency of information in supporting efficient markets. Drawing on this experience, he considers the development of market microstructure and suggests that order-matching systems rather than primary dealers may be appropriate in some of the less-developed markets.

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