Buybacks of domestic debt in public debt management

This paper shows how public debt repurchases can be used to reduce the costs of debt service under the hypothesis that the government could be of two types and that there is asymmetric information between the government and the private sector. For example, at the beginning of a fiscal stabilisation a government typically does not enjoy full credibility among investors and high interest rates on long-term bonds may reflect credibility problem rather than term premia. In a two period framework, this paper suggests that buybacks could be used to reduce the risk premia since they can signal government commitment to a previously-announced policy.