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GDP-linked bonds and sovereign default

Author

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  • Barr, David

    (Bank of England)

  • Bush, Oliver

    (Bank of England)

  • Pienkowski, Alex

    (Bank of England)

Abstract

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.

Suggested Citation

  • Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
    • Handle: RePEc:boe:boeewp:0484
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; contingent pricing; debt management; sovereign debt; sovereign default;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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