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Pricing Growth-Indexed Bonds

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Author Info

  • Paolo Mauro
  • Marcos Chamon

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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/216.

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Length: 26
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/216

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Keywords: Emerging markets;

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References

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  1. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
  2. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  3. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity - Evidence and Interpretation," IMF Working Papers 01/2, International Monetary Fund.
  4. Manasse, Paolo & Roubini, Nouriel, 2009. ""Rules of thumb" for sovereign debt crises," Journal of International Economics, Elsevier, vol. 78(2), pages 192-205, July.
  5. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
  6. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  7. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
  8. Enrique G. Mendoza & P. Marcelo Oviedo, 2009. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America The Cases of Brazil, Colombia, Costa Rica and Mexico," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 133-173, July-Dece.
  9. Maurice Obstfeld & Giovanni Peri, 1999. "Regional Nonadjustment and Fiscal Policy: Lessons for EMU," NBER Working Papers 6431, National Bureau of Economic Research, Inc.
  10. 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.
  11. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
  12. repec:rus:hseeco:123922 is not listed on IDEAS
  13. 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.
  14. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  15. Paul R. Krugman, 1989. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Luca Antonio Ricci & Marcos Chamon & Alejo Costa, 2008. "Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants," IMF Working Papers 08/109, International Monetary Fund.
  4. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  5. Ken Miyajima, 2006. "How to Evaluate GDP-Linked Warrants: Price and Repayment Capacity," IMF Working Papers 06/85, International Monetary Fund.
  6. World Bank, 2008. "Country Insurance : Reducing Systemic Vulnerabilities in Latin America and the Caribbean," World Bank Other Operational Studies 8010, The World Bank.
  7. Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.
  8. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.

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