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GDP-linked Bonds: Some Simulations on EU Countries

Nicolas Carnot and Stéphanie Pamies Sumner

No 73, European Economy - Discussion Papers 2015 - from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: The economic and fiscal outlook has recently improved for European economies, raising the odds that high public debts inherited from the crisis will be gradually wound down in line with EU fiscal rules. This will however take time and future debt trajectories remain exposed to significant uncertainties. In this context, this paper explores some implications of GDP-linked bonds (GLBs), an instrument for national debt management that has recently sparked growing interest. Based on the data and tools of the Commission Debt Sustainability Monitor, our results suggest significant potential benefits from GLBs in reducing debt uncertainties for all European economies. These benefits would be notably large in countries characterised by medium-to-high debt, high macroeconomic volatility and limited alternative tools to smoothen shocks. A risk premium would not eliminate the debt-stabilisation benefits brought by GLBs. The fall in the probability of explosive debt paths could also reduce the premium demanded by investors on conventional bonds in high-debt countries. The issuance of a fraction of GLBs can however be no substitute for pursuing sound economic and budgetary policies curbing national debts.

JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-12
New Economics Papers: this item is included in nep-cmp, nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:073

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