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GDP-linked bonds and sovereign default

Listed author(s):
  • 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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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp484.pdf
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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
Handle: RePEc:boe:boeewp:0484
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  11. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1989. " LDC Debt: Forgiveness, Indexation, and Investment Incentives," Journal of Finance, American Finance Association, vol. 44(5), pages 1335-1350, December.
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  15. Miller, Marcus & Zhang, Lei, 2013. "Fiscal consolidation: Dr Pangloss meets Mr Keynes," CAGE Online Working Paper Series 159, Competitive Advantage in the Global Economy (CAGE).
  16. Mendoza, Enrique G. & Ostry, Jonathan D., 2008. "International evidence on fiscal solvency: Is fiscal policy "responsible"?," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1081-1093, September.
  17. S M Ali Abbas & Nazim Belhocine & Asmaa El-Ganainy & Mark Horton, 2011. "Historical Patterns and Dynamics of Public Debt—Evidence From a New Database," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 717-742, November.
  18. Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.
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