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A Change of Denomination: The Case for CPI-Indexed World Bank Lending

Author

Listed:
  • Fernando Garcia
  • Ricardo Hausmann

    (Harvard's Growth Lab)

Abstract

This paper asks whether the World Bank can change the denomination of its lending without weakening its own financial position. Using monthly CPI and exchange-rate data, we construct the dollar returns the Bank would earn on loans indexed to borrowers’ domestic inflation and aggregate those returns using current IBRD and IDA portfolio weights. Country returns are volatile. Portfolio returns are much calmer because cross-country correlations are low. The diversification dividend is large enough to make the financially indifferent coupon on a CPI-indexed instrument close to, and in some cases below, current lending rates. The World Bank can reduce one of the core sources of macroeconomic instability in borrowing countries at little or no financial cost to itself.

Suggested Citation

  • Fernando Garcia & Ricardo Hausmann, 2026. "A Change of Denomination: The Case for CPI-Indexed World Bank Lending," Growth Lab Working Papers 271, Harvard's Growth Lab.
    • Handle: RePEc:glh:wpfacu:271
    as

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    References listed on IDEAS

    as
    1. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2023. "Yet it Endures: The Persistence of Original Sin," Open Economies Review, Springer, vol. 34(1), pages 1-42, February.
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