Abstract

Theoretical Interest-related Aspects of Debt Management in an Open Economy

The study shows what conditions the international interest system imposes on the government debt management of a country and what effects are triggered when a country withdraws from the interest system by introducing foreign trade safeguards via the exchange rate. The analysis differs ın this respect from the studies to be found in the literature, which start out as a rule from the conditions prevailing in a closed economy shielded from foreign influences. In regard to the objectives of debt management, a distinction is drawn between interest-cost minimization and trade cycle stabilization. The study demonstrates that the international interest system creates conditions under which the first-named objective can be more easily attained by way of a more effectively pursued debt management policy. It must be taken into consideration, however, that - as explained in detail - the inflation rate in the United States largely determines the cost of debt management in other countries. As far as the objective of trade cycle stabilization is concerned, it is found that the bringing about of demand effects via interest-rate changes effected by debt conversion operations under debt management policy is quite impossible or possible only to a negligible extent. If a country evades complying with the conditions of the international interest system by resorting to a flexible exchange rate, the successful mechanisms of debt management expected of a debt conversion policy and dealt with in the literature will take effect, because that policy can be freed from foreign, and particularly American, price and interest-rate dominance and be oriented solely to the given requirements.