The Checks of Czechs: Optimizing the Debt Portfolio of the Czech Government

Sound debt management practices help protect government expenditures on debt servicing from aggregate shocks and prevent the occurrence of debt crises. Building on Giavazzi and Missale (2004), this article examines the optimal allocation of government debt for the Czech Republic. To calibrate conditional expectations of macro variables and to identify unexpected shocks, a vector autoregression (VAR) model for the Czech macroeconomy is estimated. The estimated optimal allocations across short-term debt, inflation-linked debt, long-term debt, and foreign currency debt are then discussed in relation to the actual allocations implemented by the government debt managers in the Czech Republic. We find that the manager of Czech government’s debt allocates too much debt into short-term bills and too little debt into inflation-linked bonds based on the estimated optimal allocations. Deepening the market for inflation-linked bonds and improving government cash management are the core policy recommendations.