CEPII, Recherche et Expertise sur l'economie mondiale
Public-Debt Financing in the case of External Debt

Gianluca Cafiso

 Highlights :
  • The role of foreign investors in the financing of a country’s public debt has pros and cons which are relevant for the analysis of its sustainability.
  • Foreign investors can be seen as new investors who alleviate the financing burden on the domestic economy, but their involvement can bring risks too because of their softer commitment.
  • The analysis over the sample considered points towards the irrelevance of the investors’ base, at least in certain periods.

 Abstract :
The objective of this paper is to assess whether non-residents’ holdings of a country’s debt make a difference for debt stabilization, where non-residents’ holdings are considered external debt according to a Balance of Payments perspective. The analysis is empirical and considers the case of Italy, one of the world’s largest debt issuer. We detect two possible channels through which external debt might alter the conditions for debt stabilization. Among these, we focus on the Interest Rate Determination in the primary market of Government Bonds. Our results point out the irrelevance of the investors base for debt stabilization.

 Keywords : External Debt | Auction Redemption Yield | Debt Stabilization | Vector Auto Regression | Regime Switch

 JEL : E63, F34, G11, H63
CEPII Working Paper
N°2013-37, November 2013

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 Fields of expertise

Money & Finance