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Indexed Sovereign Debt: a Survey and a Framework of Analysis

  • Guido Sandleris
  • Filippo Taddei

A small number of countries have issued real indexed sovereign debt in recent year. This type of contracts could improve risk sharing between debtor countries and international creditors and diminish the probability of occurrence of debt crises. However, it is not clear the magnitude of these effects in terms of welfare. Furthermore, it has not been analyzed whether the design of the existing contracts was optimal. This paper addresses these issues. We characterize the optimal features of indexed debt contracts in a dynamic stochastic equilibrium framework with incomplete markets and compare them to existing ones. Finally, we obtain a quantitative approximation of the welfare effects of indexation. We find that the optimal contract improves welfare and features payments increasing in the state of the economy. Existing real indexed contracts usually entail payments increasing in the state of the economy. However, they also feature threshold levels of the chosen real variable that trigger payments. We argue that the latter are usually suboptimal. Calibrating our model to Argentina’s economy we find that the welfare gains from introducing indexed debt are equivalent to an increase of between 0.6% and 2%.

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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 66.

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Length: 37 pages
Date of creation: 2007
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Handle: RePEc:cca:wpaper:66
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