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Indexed Sovereign Debt: An Applied Framework

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  • Guido Sandleris
  • Horacio Sapriza
  • Filippo Taddei

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 of between 0.1% and 0.5% in certainty equivalent aggregate consumption.

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Bibliographic Info

Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2009-01.

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Length: 25 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:udt:wpbsdt:2009-01

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References

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  1. 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.
  2. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  3. Sandleris, Guido, 2008. "Sovereign defaults: Information, investment and credit," Journal of International Economics, Elsevier, vol. 76(2), pages 267-275, December.
  4. Aizenman, Joshua & Lee, Jaewoo, 2007. "Financial versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," Santa Cruz Department of Economics, Working Paper Series qt5r95t1xf, Department of Economics, UC Santa Cruz.
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Citations

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Cited by:
  1. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
  2. Ewald Nowotny, 2013. "Opening Address SUERF/OeNB/BWG Conference on ‘The Future of Sovereign Borrowing in Europe’," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. Juan Carlos Hatchondo & Francisco Roch & Leonardo Martinez, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 12/30, International Monetary Fund.
  4. Morten Balling & Ernest Gnan & Johannes Holler, 2013. "Introduction and Key Findings," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  5. repec:udt:wpbsdt:nombre_del_archivo is not listed on IDEAS
  6. Daniel A. Dias & Christine J. Richmond & Mark L.J. Wright, 2011. "The Stock of External Sovereign Debt: Can We Take the Data At ‘Face Value’?," NBER Working Papers 17551, National Bureau of Economic Research, Inc.
  7. Guido Sandleris & Mark J.L Wright, 2013. "GDP-Indexed Bonds: A Tool to Reduce Macroeconomic Risk?," Business School Working Papers 2013-02, Universidad Torcuato Di Tella.
  8. Johannes Holler, 2013. "Funding Strategies of Sovereign Debt Management: A Risk Focus," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 51–74.
  9. Maria Cannata, 2013. "Risk Management of a Public Debt Portfolio: The Italian Experience," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  10. Hans J. Blommestein, 2013. "Forces Shaping the OECD Sovereign Borrowing Outlook with Emphasis on the Challenges for European Sovereign Issuers," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  11. Juha Kilponen, 2013. "European Debt Crisis and Crisis Resolution Policies," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  12. 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.
  13. Alessandro Missale, 2013. "The Future of Sovereign Borrowing in Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    • Morten Balling & Ernest Gnan & Johannes Holler & Ulrich Bindseil & Nicolas Sauter & Hans J. Blommestein & Maria Cannata & Juha Kilponen & Alessandro Missale & Ewald Nowotny & Guido Sandleris & Mark L., 2013. "The Future of Sovereign Borrowing in Europe," SUERF Studies, SUERF - The European Money and Finance Forum, number 2013/5 edited by Morten Balling & Ernest Gnan & Johannes Holler.
  14. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
  15. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  16. Ulrich Bindseil, 2013. "The Role of Sovereign Debt in Monetary Policy Implementation – An International Comparative Perspective," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  17. Juan Carlos Hatchondo & Cesar Sosa-Padilla & Leonardo Martinez, 2010. "Debt dilution, overborrowing, and sovereign default risk," 2010 Meeting Papers 481, Society for Economic Dynamics.

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