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Optimal GDP-indexed Bonds

Author

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  • Yasin Kursat Onder

    (University of Ghent)

Abstract

I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government's debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets. (Copyright: Elsevier)

Suggested Citation

  • Yasin Kursat Onder, 2023. "Optimal GDP-indexed Bonds," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 747-777, December.
    • Handle: RePEc:red:issued:21-334
    DOI: 10.1016/j.red.2023.08.002
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    1. Optimal GDP-indexed Bonds
      by Christian Zimmermann in NEP-DGE blog on 2022-12-23 05:04:59

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    More about this item

    Keywords

    GDP-indexed bonds; Sovereign default; Risk sharing; State-contingent assets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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