Public Foreign Currency Dept: A Cross-Country Evaluation of Competing Theories

Treasury policies of countries with fully developed capital markets differ markedly in the area of currency de nomination of the dept. The paper aims to shed light on the empirical determinants of the currency denomination of the public debt on a cross-country basis. It thus lays out and evaluates the three main themes derived by the theoretical literature on debt management – namely Tobin’s (1963) portfolio management approach, Barro’s (1979) tax smoothing theory and the policy credibility theory. It then adds a selection of institutionally-based explanations, representing alternatives to those derived fro economic theory, which may carry some weight with sovereign treasurers. It then analyzes the evidence on a sample of twenty-two low-inflation developed countries. In addition, a questionnaire is submitted to debt managers, asking which of the competing theories is of any relevance in shaping their debt management policy. The analysis finds no “common factor” with a sufficient explanatory power for the whole set of countries. However, a subset of theories seems to be relevant for a limited number of the countries under scrutiny, in line with the answers to the questionnaire.