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Performance-Sensitive Government Bonds

Author

Listed:
  • Matthias Bank

    () (CFA, University of Innsbruck, Department of Banking and Finance)

  • Alexander Kupfer

    () (University of Innsbruck, Department of Banking and Finance)

  • Rupert Sendlhofer

    () (University of Innsbruck, Department of Public Finance)

Abstract

Steadily growing debt ratios indicate that current sovereign debt policy lacks important incentives for governments and politicians to fulfill it in a long-term sustainable way. To implement proper incentives, we propose the concept of performance- sensitive government bonds (PSGB) where coupon payments are closely linked to debt policy, giving strong incentives to limit debt levels and to timely restructure the economy. In addition, we show that the current mechanisms used to solve sovereign debt problems within the EMU are not only missing the right incentives but also setting the wrong ones.

Suggested Citation

  • Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2014. "Performance-Sensitive Government Bonds," Credit and Capital Markets, Credit and Capital Markets, vol. 47(1), pages 79-101.
  • Handle: RePEc:kuk:journl:v:47:y:2014:i:1:p:79-101
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    More about this item

    Keywords

    Sovereign debt policy; government bond; incentive; contingent debt; EMU;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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