Quantitative Implications of Indexed Bonds in Small Open Economies: Working Paper 2006-12

C. Bora Durdu

No 18245, Working Papers from Congressional Budget Office

Abstract: Recent studies have proposed setting up a benchmark market for indexed bonds to prevent "Sudden Stops," emerging-market crises initiated by sudden reversals of capital inflows. This paper analyzes the macroeconomic implications of such bonds, which would be indexed to the terms of trade or GDP, using a general equilibrium model of a small open economy with financial frictions. Although indexed bonds provide a hedge to income fluctuations and can thereby mitigate the effects of financial frictions, they introduce interest rate fluctuations. Because of this tradeoff

Date: 2006-11-15
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