Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities

Departmental Papers, March 14, 2018

Source details

Canonical URL

Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Jonathan David Ostry, Jun I Kim
• Published: March 14, 2018
• Series: Departmental Papers
• DOI: https://doi.org/10.5089/9781484330937.087

Overview

• Context: Aftermath of the global financial crisis left many advanced economies with very high sovereign debt ratios and some emerging markets with high debt.
• Central question: Whether there are ways to expand fiscal space that do not involve countries paying down debt or promising to do so in the future, and whether fiscal consolidation can be made more growth-friendly.
• Proposed mechanisms examined: issuance of GDP-linked debt and issuance of longer maturity bonds (as opposed to short-term debt).
• Focus: Effect of these debt management policies on real borrowing costs and default risk for the sovereign.

Key findings and conclusions

• Debt management policies can expand fiscal space for a given path of primary fiscal balances by reducing the risk that a sovereign may default in bad states.
• Reducing default risk can generate a payoff in terms of reduced real borrowing costs.
• The report provides estimates and simulations of potential gains in fiscal space flowing from debt management.
• The findings are sensitive to underlying assumptions; the report analyzes this sensitivity.

Literature, scope, and methodological contributions

• Details the literature on:
  • GDP-linked debt
  • The maturity structure of sovereign debt
• Identifies and fills gaps in the literature by:
  • Linking uncertainty, fiscal space, and debt-management instruments
  • Estimating how debt management can play a role in increasing fiscal space
  • Running simulations to quantify potential gains

Policy implications and recommendations

• Debt management (issuance of GDP-linked instruments and longer-term bonds) is presented as a complement to fiscal policy choices to:
  • Increase fiscal space without requiring contractionary fiscal policy
  • Make fiscal consolidation more growth-friendly and produce larger gains in fiscal space
• Emphasizes careful consideration of assumptions and sensitivities when designing debt-management strategies.

Key statistics and publication metadata

• Authors: Jonathan David Ostry, Jun I Kim
• Date: March 14, 2018
• Pages: 47
• Volume: 2018
• Issue: 004
• Series: Departmental Paper No. 2018/004
• DOI: https://doi.org/10.5089/9781484330937.087
• Stock No: BFSGDPEA
• ISBN: 9781484330937
• ISSN: 2616-5333
• Subjects: Asset and liability management, Debt default, Debt limits, Debt service, External debt, Fiscal policy, Fiscal space, Fiscal stance
• Keywords: debt contract, Debt default, debt duration, Debt limits, debt limits of the GDP-linked bond, Debt service, debt-stabilizing effect, default risk, DP, DPPP, expected return, fiscal policy, Fiscal space, Fiscal stance, Global, interest rate, long-term debt, risk neutrality, short-term debt

Source: Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities, Jonathan David Ostry and Jun I Kim, Departmental Papers 2018, 004, March 14, 2018.

Content in this bundle

• Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities
  • Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities (Markdown version)
  • Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities (PDF)