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GDP-linked bonds and sovereign default

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  • Barr, David

    ()
    (Bank of England)

  • Bush, Oliver

    ()
    (Bank of England)

  • Pienkowski, Alex

    ()
    (Bank of England)

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    Abstract

    Using a calibrated model of endogenous sovereign default, we explore how GDP-linked bonds can raise the maximum sustainable debt level of a government, and substantially reduce the incidence of default. The model explores both the costs (in particular the GDP risk premium) and the benefits of issuing GDP-linked bonds. It concludes that significant welfare gains can be achieved by indexing debt to GDP.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp484.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 484.

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    Length: 40 pages
    Date of creation: 31 Jan 2014
    Date of revision:
    Handle: RePEc:boe:boeewp:0484

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    Related research

    Keywords: Fiscal policy; contingent pricing; debt management; sovereign debt; sovereign default;

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