Reviving the Case for GDP-Indexed Bonds

September 1, 2002

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Format: Chicago

Eduardo Borensztein, and Paolo Mauro. Reviving the Case for GDP-Indexed Bonds, (USA: International Monetary Fund, 2002) accessed September 19, 2024

Disclaimer: This Policy Dicussion Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bonds, Debt default, Emerging and frontier financial markets, External debt, Financial crises, Financial institutions, Financial markets, Inflation-indexed bonds

Keywords: Africa, Bonds, Debt default, Debtor country, Emerging and frontier financial markets, Emerging markets, GDP growth, GDP indexation, GDP ratio, GDP-indexation of bond repayment, GDP-indexed bond, GDP-indexed bonds, Global, Inflation-indexed bonds, PDP, Plain vanilla, Ratio path

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Policy Discussion Paper No. 2002/010
Stock No:

PPIEA0102002
ISBN:

9781451970173
ISSN:

1564-5193

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