Optimal GDP-indexed Bonds

Onder, Yasin

Optimal GDP-indexed Bonds

Review of Economic Dynamics, 2023, vol. 51, 747-777

Abstract: I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government's debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets. (Copyright: Elsevier)

Keywords: GDP-indexed bonds; Sovereign default; Risk sharing; State-contingent assets (search for similar items in EconPapers)
JEL-codes: F34 G11 G13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.red.2023.08.002

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