GDP-Linked Bonds and Sovereign Default
40 Pages Posted: 2 Feb 2014
Date Written: January 31, 2014
Using a calibrated model of endogenous sovereign default, we explore how GDP-linked bonds can raise the maximum sustainable debt level of a government, and substantially reduce the incidence of default. The model explores both the costs (in particular the GDP risk premium) and the benefits of issuing GDP-linked bonds. It concludes that significant welfare gains can be achieved by indexing debt to GDP.
Keywords: Fiscal policy, contingent pricing, debt management, sovereign debt, sovereign default
JEL Classification: E95, G16, H63
Suggested Citation: Suggested Citation