Reviving the Case for GDP-Indexed Bonds

Reviving the Case for GDP-Indexed Bonds

by Mr. Eduardo Borensztein, Mr. Paolo Mauro
     
 

This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds. We simulate the effects of GDP-indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood that debt/GDP paths become explosive. The…  See more details below

Overview

This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds. We simulate the effects of GDP-indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood that debt/GDP paths become explosive. The insurance premium would likely be small, because cross-country comovement of GDP growth rates is low and cross-country GDP growth risk is thus largely diversifiable for an investor holding a portfolio of GDP-indexed bonds. Potential obstacles to the emergence of a market for these bonds include the verifiability of GDP data, the trade-off between insurance and moral hazard, and the need for liquidity. The paper discusses institutional fixes and suggests an approach to attempting to start up a market.

Product Details

ISBN-13:
9781455294183
Publisher:
INTERNATIONAL MONETARY FUND
Publication date:
09/01/2002
Sold by:
Barnes & Noble
Format:
NOOK Book
File size:
1 MB

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