Taming Debt: Can GDP-Linked Bonds Do the Trick?
Jean-Paul Renne and
Jean-Guillaume Sahuc ()
No 2020-13, EconomiX Working Papers from University of Paris Nanterre, EconomiX
We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. Three results stand out: (i) GDP-linked bond prices would embed sizeable and time-varying risk premiums of about 40 basis points, (ii) for a fixed budget surplus, issuing GDP-linked bonds does not necessarily imply more beneficial debt-to-GDP ratios in the medium- to long-run, and (iii) the debt-stabilizing budget surplus is more predictable under such issuances at the expense of being higher on average. Our findings call into question the view that GDP-linked bonds tame debt.
Keywords: GDP-linked bonds; debt stabilization; consumption-based model; term structure (search for similar items in EconPapers)
JEL-codes: H62 H63 E43 E44 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2020-13
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