Boosting fiscal space: the roles of GDP-linked debt and longer maturities
Jun Il Kim and
Jonathan Ostry
Economic Policy, 2020, vol. 35, issue 104, 587-634
Abstract:
SUMMARYThis paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits.
Keywords: H62; H63; fiscal space; GDP-linked debt; debt maturity; fiscal insurance (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://hdl.handle.net/10.1093/epolic/eiaa024 (application/pdf)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities (2018) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:35:y:2020:i:104:p:587-634.
Access Statistics for this article
Economic Policy is currently edited by Ghazala Azmat, Roberto Galbiati, Isabelle Mejean and Moritz Schularick
More articles in Economic Policy from CEPR, CESifo, Sciences Po Contact information at EDIRC., CES Contact information at EDIRC., MSH Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().