Debt-stabilizing properties of GDP-linked securities: A macro-finance perspective

Sarah Mouabbi, Jean-Paul Renne and Jean-Guillaume Sahuc

Journal of Banking & Finance, 2024, vol. 162, issue C

Abstract: We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. To this end, we derive quasi-analytical pricing formulas for any type of bond/equity by exploiting the discretization of the state-space, making large-scale simulations tractable. We find that GDP-linked security prices would embed time-varying risk premiums of about 40 basis points. For a fixed budget surplus, issuing GDP-linked securities does not imply more beneficial debt-to-GDP ratios in the long-run, while the debt-stabilizing budget surplus is more predictable at the expense of being higher. Our findings call into question the view that such securities tame debt.

Keywords: GDP-linked securities; Term structure; Consumption-based model; Markov-switching; Debt stabilization (search for similar items in EconPapers)
JEL-codes: C32 E43 G12 G18 H63 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Debt-Stabilizing Properties of GDP-Linked Securities: A Macro-Finance Perspective (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:162:y:2024:i:c:s0378426624000517

DOI: 10.1016/j.jbankfin.2024.107131

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