The rationale for GDP-linked bonds for the euro area

Lorenz Emter and Valerie Herzberg
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Valerie Herzberg: Central Bank of Ireland

No 10/EL/18, Economic Letters from Central Bank of Ireland

Abstract: Performance related government bonds such as GDP-linked bonds can play a role in enhancing the architecture of the Economic Monetary Union. This Letter highlights the potential contribution of such instruments to reduce and share risks outside of financial crisis through more integrated capital markets. For governments to avail of this insurance, however, and to issue these bonds requires the additional cost or premium to be contained. Using the Capital Asset Pricing Model as a yardstick, we find that in the euro area this is likely to be the case for large issuers. Consequently, large member states should lead the development of this market.

Date: 2018-11
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