Bohn, Henning, 1990, “A Positive Theory of Foreign Currency Debt,” Journal of International Economics, No. 29, pp. 273–292.
Danmarks Nationalbank, “Danmark’s External Debt 1998,” Statistisk Afdeling, No. 24–8 March 1999, Table 2, (Copenhagen, Denmark).
Prepared by Laura Kodres.
The Danish Economy: Medium-Term Economic Survey, March 1999, p. 54.
From the Act, passed December 22, 1993, setting out the legislative basis for government borrowing.
The source of much of the information in this section comes from “Danish Government Borrowing and Debt” published by Danmarks Nationalbank, 1998, and other publications of the Nationalbank.
Other public sector entities had net foreign assets of about DKr 14 billion at the end of 1998.
The EMU debt includes the liabilities of both the central and local governments but also allows the public sector’s claims on itself, i.e., holdings of government securities held by the Social Pension Fund and other social funds, to be deducted.
When the central government issues foreign-denominated debt, the proceeds are added to foreign exchange reserves and the balance in the central government’s account at the central bank increases. Article 104 of the Maastricht treaty, which prohibits monetary financing, imposes the constraint that the balance of the central government’s account with the Nationalbank must be positive at all times.
This occurred in 1998 when Tele Danmark, a partially government-owned entity, was fully privatized by a sale of stock to foreigners. The proceeds from the sale were used to reduce the central government’s foreign liabilities.
This measure of duration is a weighted discounted present value of the coupon payments and final par value where the weights are the time in years from the present for each of the cash flows. Duration provides a more precise measure of the potential interest rate risk of a portfolio of bonds than the average of stated maturities by accounting for the effect that the different timing of the cash flows has on the portfolio’s price sensitivity to interest rate changes.
The model does not include the goal of maintaining a liquid government securities market for capital market development nor the notion that continual debt issuance may make it easier to access debt markets in times of distress.
The term “nominal” debt will refer to domestically-denominated government debt that is not indexed.
Actually, all that is necessary is that foreign investors are sufficiently less risk averse than the domestic ones that they are willing to provide the “insurance” represented by government debt. If foreigners are not risk neutral, then they would also want to hedge their own countries’ output risk, complicating the solution of the model by requiring four types of debt. Bohn argues that international investors are likely to be more diversified and less risk averse than the typical taxpayer.
The model is specified in terms of inverse velocity instead of velocity since the money balances are determined in the model as inverse velocity times the price level times output.
Inflation is negatively correlated with output given a fixed money supply growth rate (that is, the government cannot manipulate inflation), exogenous output, and the equation determining inflation, where a is the change in inverse velocity.
See Bohn, p. 284.
Bohn explicitly assumes actual default is not available only the “excusable” default of a decrease in the real value through inflation.
The EU11 includes Germany so the results cannot be viewed as unrelated to those of Germany.
Recall the model is in terms of inverse velocity as is the empirical work in this section.
The endogeneous variable, the difference of logged real Danish GDP, does not reject the normality test.