Growth-Indexed Bonds and Debt Distribution: Too Little, Too Costly?

IMF Working Papers, April 10, 2026

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Canonical URL: Growth-Indexed Bonds and Debt Distribution: Too Little, Too Costly?

Sovereign state-contingent bonds have rarely been issued despite their theoretical debt stabilization properties.
The paper analyzes when growth-indexed bonds are too limited in scale, and when they are too costly, to materially improve debt sustainability.
Results show that the benefits of indexation are highly heterogeneous across countries.

Under the realistic assumption that 20 percent of the debt stock is indexed, reductions in the upper tail of the debt distribution are modest.
Full indexation yields more substantial improvements in debt distribution and sustainability, especially when combined with an optimal loading on growth.
A sustained premium of 100 basis points would offset most of the gains from indexation for many countries.
Pages: 51
Series: Working Paper No. 2026/080
DOI: https://doi.org/10.5089/9798229044394.001
ISBN: 9798229044394
ISSN: 1018-5941

Heterogeneity: The effectiveness of growth-indexed bonds varies significantly across countries, implying country-specific assessments are necessary.
Scale vs. cost trade-off: Limited scale of indexed issuance (e.g., 20 percent of debt) produces only modest improvements; achieving meaningful debt-stabilization effects requires large-scale adoption.
Premium sensitivity: Even when full indexation is feasible, issuance premia—illustrated by a sustained premium of 100 basis points—can negate much of the stabilization benefit.

Broad adoption: Debt-stabilization properties of growth-indexed bonds are likely to be limited unless a large-scale and coordinated effort achieves broad adoption.
Low issuance premia: Success requires keeping issuance premia low; elevated premia (for example, 100 basis points sustained) can offset gains from indexation.
Optimal design: Combining full indexation with an optimal loading on growth enhances outcomes and should be considered in bond design and policy frameworks.
Country tailoring: Policymakers should evaluate country-specific heterogeneity when considering issuance of growth-indexed bonds.

Source: Working Paper No. 2026/080