Managing Public Portfolios

Abstract

Managing public portfolios is a crucial policy issue that concerns economists, policymakers, and the general public. However, existing literature on debt management offers little practical guidance on the types of securities it should issue and the frequency with which a government should rebalance its asset portfolio. In this paper, we develop a unified framework for optimal management of public portfolios for a general class of models imposing very few restrictions on risk and liquidity preferences of households and market structure for financial assets. Methodologically, we expand the “sufficient statistics” approach widely used in public finance and derive formulas for optimal portfolios that summarize the normative prescriptions using a small number of empirical moments. When applied to US data, we find that the optimal debt portfolio is largely described by exponentially declining weights on longer maturities, and it needs little rebalancing over time. The results are driven by a quantitatively large role played by the motive to hedge interest rate risk.