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Reviving the Case for GDP-Indexed Bonds

Eduardo Borensztein and Paolo Mauro ()

No 02/10, IMF Policy Discussion Papers from International Monetary Fund

Abstract: This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds. We simulate the effects of GDP-indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood that debt/GDP paths become explosive. The insurance premium would likely be small, because cross-country comovement of GDP growth rates is low and cross-country GDP growth risk is thus largely diversifiable for an investor holding a portfolio of GDP-indexed bonds. Potential obstacles to the emergence of a market for these bonds include the verifiability of GDP data, the trade-off between insurance and moral hazard, and the need for liquidity. The paper discusses institutional fixes and suggests an approach to attempting to start up a market.

Keywords: Emerging markets; International financial markets; GDP-indexed bonds, debt, indexed bonds, indexation, interest rate, interest, International Monetary Arrangements and Institutions, International Lending and Debt Problems, Financial Aspects of Economic Integration, (search for similar items in EconPapers)
Pages: 25
Date: 2002-09-01
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