Not taking debt at face value, or market value or amortized cost: Policy value as a measure of the burden of public debt

• Published date: 01 August 2019
• Author: Timothy C. Irwin
• DOI: http://doi.org/10.1111/faam.12196
• Date: 01 August 2019

Received: 30 January 2018 Revised: 19 September 2018 Accepted: 30 October 2018

DOI: 10.1111/faam.12196

ORIGINAL ARTICLE

Not taking debt at face value, or market value or

amortized cost: Policy value as a measure of the

burden of public debt

Timothy C. Irwin

Independent Researcher, Washington,District of

Columbia, USA

Correspondence

TimothyC. Irwin, Independent Researcher, 950

MaineAve. SW, Washington,DC 20024, USA.

Email:timothyirwin@hotmail.com

Abstract

Public debt is sometimes measured at its market value or amortized

cost, the measurement bases prescribed by international accounting

standards and statistical guidelines. But an overview of 191 coun-

tries and a closer investigation of 19 shows that public debt is most

often measured at face value. An analysis of the three measurement

bases and the discount rates on which they explicitly or implicitly

depend shows that all are unsatisfactory as indicators of the bur-

den that the debt imposes on the government. On the one hand,

face value is manipulable: governments can borrow as much as they

wish while reporting virtually no debt at all at face value. Though no

government has done this, there is some, inconclusive evidence that

a few may have exploited the manipulability of face value to slow

the growth of reported debt. On the other hand, market value and

amortized cost are unsatisfactory because they vary with the gov-

ernment’s creditworthiness. Thus, for example, the market value of

a government’sdebt declines as the government becomes financially

distressed. An alternative measurement basis is proposed here that

does not suffer from these problems, namely policy value, which is

the value of the debt conditional on the government’s carrying out

its policy toward the debt, or the present value of planned debt pay-

ments at the debt’s marketinterest rate less any credit-risk premium

in that rate.

KEYWORDS

amortized cost, face value, fairvalue, measurement basis, public debt

1INTRODUCTION

How should public debt be valued? At its market value, amortized cost, face value, or something else? And how is it

valued in practice? This paper investigatesthe measurement bases that are used to value public debt around the world

Financial Acc & Man. 2019;35:275–289. wileyonlinelibrary.com/journal/faam c

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