Should Emerging Markets have an Independent Debt Management Authority?

Abstract

Current standards call for a country's debt manager to serve as a passive agent of the finance ministry, a passive optimizer of existing conditions. This approach is widely practiced in developed and emerging markets. However, I argue, drawing heavily on fiscal dominance theory, emerging-market environ­ments are more likely to reflect "non-Ricardian" conditions. Consequently, fiscal action in general, and debt management specifically takes on a heightened role, given the possibility of adverse interaction with the monetary policy regime. Simi­larly, the potential for adverse interaction between monetary policy and debt management suggests a need for increased strategic action within the treasury department and the inabil­ity to rely on a static management strategy. A debt authority that rests under the control of the finance ministry or the central bank cannot strategically incorporate the impacts of their actions on portfolio composition and value. Both the existence of short-termist political problems and the potential for politically motivated optimization lead to my suggestion of an independent debt management authority.