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Pay high in good times, pay low in bad times

Author

Listed:
  • Michael Schröder

    (Centre for European Economic Research (ZEW), Mannheim, Germany)

  • Friedrich Heinemann

    (Centre for European Economic Research (ZEW), Mannheim, Germany)

  • Susanne Kruse

    (Hochschule der Sparkassen-Finanzgruppe (University of Applied Sciences), Bonn, Germany)

  • Matthias Meitner

    (Centre for European Economic Research (ZEW), Mannheim, Germany)

Abstract

The paper examines the applicability of GDP-linked bonds for the financing of developing countries. These bonds are characterised by tying the coupon and|or redemption payments to the GDP of the issuing country. Along with an analysis of their pricing behaviour and of their behaviour in a portfolio context, the study also encompasses a survey amongst financial experts in order to assess the prospects of success of this type of bond. Finally, the usefulness of a partial public guarantee of payments is examined. The paper provides evidence under which circumstances, for which investors and for which countries, GDP-linked bonds might be an appropriate investment vehicle. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Michael Schröder & Friedrich Heinemann & Susanne Kruse & Matthias Meitner, 2007. "Pay high in good times, pay low in bad times," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(5), pages 667-683.
    • Handle: RePEc:wly:jintdv:v:19:y:2007:i:5:p:667-683
    DOI: 10.1002/jid.1354
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    References listed on IDEAS

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    1. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
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    3. Susanne Kruse & Matthias Meitner & Michael Schroder, 2005. "On the pricing of GDP-linked financial products," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1125-1133.
    4. Schuknecht, Ludger, 1996. "Political Business Cycles and Fiscal Policies in Developing Countries," Kyklos, Wiley Blackwell, vol. 49(2), pages 155-170.
    5. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds [‘World income components: measuring and exploiting risk-sharing opportunities’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 19(38), pages 166-216.
    6. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
    7. Mr. Giovanni Dell'Ariccia & Mr. Jeromin Zettelmeyer & Ms. Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 2002/181, International Monetary Fund.
    8. Ludger Schuknecht, 1996. "Political Business Cycles and Fiscal Policies in Developing Countries," Kyklos, Wiley Blackwell, vol. 49(2), pages 155-170, May.
    9. Mr. Eduardo Borensztein & Mr. Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 2002/010, International Monetary Fund.
    10. Mr. Steven T Phillips & Mr. Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 2000/168, International Monetary Fund.
    11. Atkinson, A. B. (ed.), 2004. "New Sources of Development Finance," OUP Catalogue, Oxford University Press, number 9780199278565, Decembrie.
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    Cited by:

    1. Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2011. "Performance-sensitive government bonds - A new proposal for sustainable sovereign debt management," Working Papers 2011-24, Faculty of Economics and Statistics, Universität Innsbruck.
    2. 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.

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