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Pricing growth-indexed bonds

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  • Chamon, Marcos
  • Mauro, Paolo

Abstract

Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries'' fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 30 (2006)
Issue (Month): 12 (December)
Pages: 3349-3366

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Handle: RePEc:eee:jbfina:v:30:y:2006:i:12:p:3349-3366

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Web page: http://www.elsevier.com/locate/jbf

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References

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  1. Nouriel Roubini & Paolo Manasse, 2005. "Rules of Thumb for Sovereign Debt Crises," IMF Working Papers 05/42, International Monetary Fund.
  2. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
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  4. Márcio Gomes Pinto Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an Application to Brazilian Data," Textos para discussão 484, Department of Economics PUC-Rio (Brazil).
  5. Mendoza, Enrique G. & Oviedo, P. Marcelo, 2006. "Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Latin America: The Cases of Brazil, Colombia, Costa Rica, and Mexico," Staff General Research Papers 12700, Iowa State University, Department of Economics.
  6. Stefano Athanasoulis & Robert Shiller & Eric van Wincoop, 1999. "Macro markets and financial security," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 21-39.
  7. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  8. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers 01/2, International Monetary Fund.
  9. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
  10. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
  11. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  12. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  13. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
  14. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  15. repec:rus:hseeco:123922 is not listed on IDEAS
  16. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
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Citations

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Cited by:
  1. Luca Antonio Ricci & Marcos Chamon & Alejo Costa, 2008. "Is there a Novelty Premiumon New Financial Instruments? the Argentine Experience with Gdp-Indexed Warrants," IMF Working Papers 08/109, International Monetary Fund.
  2. Ken Miyajima, 2006. "How to Evaluate Gdp-Linked Warrants," IMF Working Papers 06/85, International Monetary Fund.
  3. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2011. "Public Sector Funding and Debt Management: A Case for GDP-Linked Sukuk," MPRA Paper 46008, University Library of Munich, Germany, revised 2011.
  4. Juan Carlos Hatchondo & Leonardo Martinez, 2012. "On the benefits of GDP-indexed government debt: lessons from a model of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 139-157.
  5. World Bank, 2008. "Country Insurance : Reducing Systemic Vulnerabilities in Latin America and the Caribbean," World Bank Other Operational Studies 8010, The World Bank.
  6. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  7. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
  8. Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.

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