Debt Limits and the Structure of Public Debt
IMF Working Papers, May 22, 2017
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Bibliographic details
- Authors: Alex Pienkowski
- Published: May 22, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484300657.001
Summary and key findings
- The 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.
- Calibrating the model to different country fundamentals shows that there is no one-size-fits-all approach to optimal instrument design.
- Example findings:
- Low income countries may find benefit in issuing local currency debt.
- In advanced economies debt tolerance can be substantially enhanced through issuing GDP-linked bonds.
- By examining the marginal impact of these instruments, the paper provides insight into the optimal portfolio composition.
Policy implications and recommendations
- Tailor debt instrument design to country fundamentals rather than applying a single universal strategy.
- Consider local currency issuance for low income countries to raise the sovereign debt limit.
- Consider GDP-linked bonds for advanced economies to substantially enhance debt tolerance.
- Use marginal-impact analysis of instrument types to guide optimal portfolio composition.
Methodology and scope
- The paper develops a tractable model that jointly considers currency denomination and indexation to GDP to evaluate effects on sovereign debt limits.
- Results are obtained by calibrating the model to different country fundamentals to assess heterogeneous impacts across country types.
- The analysis focuses on the marginal impact of specific instrument features on debt tolerance and portfolio choice.
Subjects and keywords
- Subject: Asset and liability management, Bonds, Debt limits, Exchange rates, Financial institutions, Fiscal policy, Fiscal stance, National accounts, Public debt, Return on investment
- Keywords: bond issuance, Bonds, contract design, debt level, debt limits, debt vulnerability, exchange rate, Fiscal stance, foreign currency, GDP shock, GDP volatility, GDP-linked bond, GDP-linked bonds, GDP-risk premium, Global, interest rate, one-size-fits-all debt strategy, Return on investment, Sovereign debt, sovereign default, state-contingent debt, WP
Source: https://www.imf.org/en/publications/wp/issues/2017/05/22/debt-limits-and-the-structure-of-public-debt-44913
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