{
  "title": "Reviving the Case for GDP-Indexed Bonds",
  "publication": "IMF Policy Discussion Papers, September 1, 2002",
  "sourceUrl": "https://www.imf.org/en/publications/imf-policy-discussion-papers/issues/2016/12/30/reviving-the-case-for-gdp-indexed-bonds-16054",
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  "summary": "This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- The paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds.\n- It uses simulations under different assumptions about fiscal policy reaction functions and their output effects to evaluate the impact of GDP-indexed bonds."
    },
    {
      "heading": "Key findings from the simulations",
      "content": "- GDP-indexed bonds could substantially reduce the likelihood that debt/GDP paths become explosive.\n- The insurance premium for GDP-indexed bonds 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."
    },
    {
      "heading": "Analysis of diversification and insurance value",
      "content": "- Low cross-country comovement of GDP growth rates implies substantial diversification benefits for investors holding portfolios of GDP-indexed bonds.\n- As a result, the cost of insurance embodied in GDP-indexation is expected to be small."
    },
    {
      "heading": "Fiscal policy interaction and scenarios",
      "content": "- The paper simulates effects under different assumptions about:\n  - fiscal policy reaction functions, and\n  - output effects of those fiscal policies.\n- Across simulated scenarios, GDP-indexed bonds reduce the probability of explosive debt/GDP dynamics."
    },
    {
      "heading": "Potential obstacles to market emergence",
      "content": "- Verifiability of GDP data.\n- Trade-off between insurance and moral hazard.\n- Need for liquidity in secondary markets."
    },
    {
      "heading": "Institutional fixes and market start-up approach",
      "content": "- The paper discusses institutional fixes to address the obstacles above.\n- It suggests an approach to attempting to start up a market for GDP-indexed bonds."
    },
    {
      "heading": "Subjects and relevant themes",
      "content": "- Bonds; Debt default; Emerging and frontier financial markets; External debt; Financial crises; Financial institutions; Financial markets; Inflation-indexed bonds.\n- Keywords include: 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.\n\nReviving the Case for GDP-Indexed Bonds, Eduardo Borensztein and Paolo Mauro, IMF Policy Discussion Paper No. 2002/010.\n\n---\n\n Content in this bundle\n\n- pdp10\n  - pdp10 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - pdp10 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/imf-policy-discussion-papers/issues/2016/12/30/reviving-the-case-for-gdp-indexed-bonds-16054"
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    "Authors: Eduardo Borensztein, Paolo Mauro",
    "Published: September 1, 2002",
    "Series: IMF Policy Discussion Papers",
    "DOI: https://doi.org/10.5089/9781451970173.003",
    "The paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds.",
    "It uses simulations under different assumptions about fiscal policy reaction functions and their output effects to evaluate the impact of GDP-indexed bonds.",
    "GDP-indexed bonds could substantially reduce the likelihood that debt/GDP paths become explosive.",
    "The insurance premium for GDP-indexed bonds 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.",
    "Low cross-country comovement of GDP growth rates implies substantial diversification benefits for investors holding portfolios of GDP-indexed bonds.",
    "As a result, the cost of insurance embodied in GDP-indexation is expected to be small.",
    "The paper simulates effects under different assumptions about:",
    "Across simulated scenarios, GDP-indexed bonds reduce the probability of explosive debt/GDP dynamics.",
    "Verifiability of GDP data.",
    "Trade-off between insurance and moral hazard.",
    "Need for liquidity in secondary markets.",
    "The paper discusses institutional fixes to address the obstacles above.",
    "It suggests an approach to attempting to start up a market for GDP-indexed bonds.",
    "Bonds; Debt default; Emerging and frontier financial markets; External debt; Financial crises; Financial institutions; Financial markets; Inflation-indexed bonds.",
    "Keywords include: 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.",
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