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GDP-linked bonds and sovereign default

  • Barr, David

    ()

    (Bank of England)

  • Bush, Oliver

    ()

    (Bank of England)

  • Pienkowski, Alex

    ()

    (Bank of England)

Using a calibrated model of endogenous sovereign default, we explore how GDP-linked bonds can raise the maximum sustainable debt level of a government, and substantially reduce the incidence of default. The model explores both the costs (in particular the GDP risk premium) and the benefits of issuing GDP-linked bonds. It concludes that significant welfare gains can be achieved by indexing debt to GDP.

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Paper provided by Bank of England in its series Bank of England working papers with number 484.

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Length: 40 pages
Date of creation: 31 Jan 2014
Date of revision:
Handle: RePEc:boe:boeewp:0484
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