Public Debt Management in Transition Countries The Case of Armenia * Luciano Greco † Svitlana Moskalyuk ‡ October 2009 Abstract Based on a simplified set of public securities (i.e. T-bills, nominal and real-indexed long-term bonds denominated in domestic currency, and dollar denominated loans), and on a simple structural model of Armenian economy, we develop an analysis of the optimal composition of Armenian public debt aiming at reducing the risk of fiscal instability while controlling the cost of public debt. Considering six sources of macroeconomic shocks (demand, sup- ply, exchange rate, domestic interest rate, international interest rates and Russian output gap), we find that optimal public debt in Armenia requires a reduction of foreign-currency denominated debt as well wider shares of fixed- rate bonds, and the introduction of real-indexed bonds. Keywords : Public debt management, transition economies, fiscal risk, Armenia JEL classification : H63, P3, F3, G1 * We are grateful to Alessandro Missale for his advice and suggestions. We thank Efrem Castel- nuovo for helpful comments and discussions on the structural model. We also thank Shushanik Mkrtchyan and Heghine Karapetyan who provided valuable information and data on the Armenian public debt. Research support from Christopher Davis is gratefully acknowledged. † Dipartimento di Scienze economiche, Universit`a degli Studi di Padova, via del Santo 33 - 35123 Padova (Italy), luciano.greco@unipd.it. ‡ Corresponding author, Dipartimento di Scienze economiche, Universit` a degli Studi di Padova, via del Santo 33 - 35123 Padova (Italy), svitlana.moskalyuk@unipd.it. 1