Reviving the Case for GDP-Indexed Bonds

Eduardo Borensztein and Paolo Mauro

No 2002/010, 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: PDP; GDP-indexed bond; GDP growth; plain vanilla; GDP ratio; Emerging markets; GDP-indexed bonds; ratio path; debtor country; GDP indexation; GDP-indexation of bond repayment; Bonds; Inflation-indexed bonds; Emerging and frontier financial markets; Debt default; Global; Africa (search for similar items in EconPapers)
Pages: 25
Date: 2002-09-01
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Citations: View citations in EconPapers (41)

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