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Paper presented at the Second OECD Workshop on Government Securities and Debt Management in Central and Eastern Europe held in Budapest, Hungary on June 4 and 5, 1992. George Iden made useful suggestions on an earlier draft of this paper. Remaining errors are, of course, mine alone.


This paper deals exclusively with domestic debt, but, needless to say, coordination between the central bank and the ministry of finance is equally important regarding external debt because there is also a strong link between external debt and monetary management.


For a discussion of the role and importance of financial reform in economic development, see Fry (1988) and the World Bank (1989).


Central bank losses often arise from the fact that government debt is one of the main central bank assets, but its yield is often poor by comparison with alternative assets.


The risk premium is relatively higher in long-term than in short-term securities in this phase of the market because financial expertise is not yet well developed and macroeconomic and political uncertainty is high. Note that the point I am making here is not that the yield curve is upward sloping but that its slope is steeper than under more normal circumstances.


For a discussion of how innovations in debt management made possible the financing of relatively large amounts of government debt in the case of Italy, see Caranza (1991).


This would also help the central bank to build up its own portfolio of securities.


For a discussion of interest rate policies during periods of financial liberalization, see Leite and Sundararajan (1990). It should be noted that while most countries use monetary aggregates as intermediate targets, nothing that has been said in this paper should be construed as meaning that interest rates cannot be used as an intermediate target of monetary policy. What certainly cannot be achieved is a simultaneous control of both interest rates and monetary aggregates; to the extent that the authorities choose to target interest rates, they will lose control of the money supply.


It may also be a sign that investors mistrust the government and fear default.


The existence of an adequate collateral for interbank operations may be a precondition for the development of an active interbank market in some countries where the leading banks may not otherwise be prepared to engage in uncovered transactions with the smaller and weaker banks.


The day-to-day cash management of the treasury may require the use of a short-term overdraft facility with the central bank. Access to this facility should be clearly limited.

Coordinating Public Debt and Monetary Management During Financial Reforms
Author: Mr. Sérgio Pereira. Leite