Debt Limits and the Structure of Public Debt

Alex Pienkowski

No 2017/117, IMF Working Papers from International Monetary Fund

Abstract: This paper provides a tractable framework to assess how the structure of debt instruments—specifically by currency denomination and indexation to GDP—can raise the debt limit of a sovereign. By calibrating the model to different country fundamentals, it is clear that there is no one-size-fits-all approach to optimal instrument design. For instance, low income countries may find benefit in issuing local currency debt; while in advanced economies debt tolerance can be substantially enhanced through issuing GDP-linked bonds. By looking at the marginal impact of these instruments, the paper also provides insight into the optimal portfolio compostion.

Keywords: WP; exchange rate; foreign currency; interest rate; GDP-linked bond; Sovereign debt; debt limits; sovereign default; state-contingent debt; GDP-linked bonds; debt level; bond issuance; contract design; GDP shock; one-size-fits-all debt strategy; GDP-risk premium; GDP volatility; debt vulnerability; Fiscal stance; Return on investment; Bonds; Global (search for similar items in EconPapers)
Pages: 21
Date: 2017-05-22
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Citations: View citations in EconPapers (2)

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