Fiscal insurance during financial distress: the case of Belgian sovereign debt in the 21st century

Abstract

We empirically test the theoretical hypothesis that long term bonds offer governments fiscal insurance in times of crisis, analyzing Belgian sovereign debt dynamics during the 21st century. We use a novel data set of monthly prices and quantities for bonds in circulation between 2000 and 2022. We calculate total market value of debt and one- period holding returns, capturing the funding cost in the government’s inter temporal budget constraint. The main findings of the study indicate a positive co movement between bond prices and government net funding requirement during periods of financial distress, suggesting a limited role of long bonds in fiscal insurance.

Examinamos empíricamente la hipótesis teórica que bonos de larga duración ofrecen seguro fiscal a gobiernos en tiempos de crisis, analizando la deuda soberana Belga durante el siglo XXI. Utilizamos una novedosa base de datos de precios y cantidades de bonos en circulación entre 2000 y 2022. Calculamos valor de mercado total de la deuda y rendimientos de tenencia de un período, capturando costos de financiamiento en la limitación presupuestaria inter-temporal del gobierno. Encontramos co movimiento positivo entre precios de bonos y requerimientos de financiamiento gubernamentales netos durante períodos de crisis, sugiriendo un papel limitado de bonos largos en el seguro fiscal.