In search of a theory of debt management

► When government can only issue non-contingent bonds the complete market approach to debt management is unreliable. ► The complete market approach recommends implausibly large positions to compensate for limited yield curve variability. ► Adding capital accumulation and habits makes this problem worse and adds additional concerns-positions become very volatile. ► The complete market approach does not produce qualitatively stable recommendations to issue long debt and short assets. ► Complete market approach is so sensitive that misspecification errors or miniscule transaction costs lead governments to prefer balanced budgets to optimal debt management. ► We need a theory of debt management that explicitly factors in reasons for market incompleteness.