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Indexed Sovereign Debt: An Applied Framework

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Guido Sandleris
Horacio Sapriza
Filippo Taddei

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Abstract

A number of countries have issued sovereign debt instruments indexed to real variables in recent years. This type of contracts could improve risk sharing between debtor countries and international creditors and diminish the probability of occurrence of debt crises. This paper characterizes the optimal features of real indexed sovereign debt contracts in a dynamic stochastic equilibrium framework with incomplete markets. We show that the optimal indexed debt contract should not be studied abstracting from the total portfolio of assets and liabilities of the issuing country. We also show that the optimal contract is similar to an insurance contract, and that a country can replicate it using existing instruments, in particular, a combination of international reserves and GDP-indexed bonds. Calibrating our model to Argentina's economy we find that the welfare gains from introducing indexed debt and allowing asset accumulation could be equivalent to an increase between 0.1% and 0.5% in certainty equivalent aggregate consumption.

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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 104.

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Length: 44 pages
Date of creation: 2008
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Handle: RePEc:cca:wpaper:104

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  3. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June. [Downloadable!] (restricted)
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  4. R. Gaston Gelos, Ratna Sahay and Guido Sandleris, 2008. "Sovereign Borrowing by Developing Countries: What Determines Market Access?," Business School Working Papers 2008-02, Universidad Torcuato Di Tella. [Downloadable!]
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  5. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June. [Downloadable!] (restricted)
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  6. Buera, Francisco & Nicolini, Juan Pablo, 2004. "Optimal maturity of government debt without state contingent bonds," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 531-554, April. [Downloadable!] (restricted)
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  7. Sandleris, Guido, 2008. "Sovereign defaults: Information, investment and credit," Journal of International Economics, Elsevier, vol. 76(2), pages 267-275, December. [Downloadable!] (restricted)
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  8. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December. [Downloadable!] (restricted)
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  9. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March. [Downloadable!] (restricted)
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  15. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March. [Downloadable!] (restricted)
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  16. Marcos Chamon & Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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  18. Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-64, December. [Downloadable!] (restricted)
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  19. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
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