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Taming Debt: Can GDP-Linked Bonds Do the Trick?

Author

Listed:
  • Sarah Mouabbi
  • Jean-Paul Renne
  • Jean-Guillaume Sahuc

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. Three results stand out: (i) GDP-linked bond prices would embed sizeable and time-varying risk premiums of about 40 basis points, (ii) for a fixed budget surplus, issuing GDP-linked bonds does not necessarily imply more beneficial debt-to-GDP ratios in the medium- to long-run, and (iii) the debt-stabilizing budget surplus is more predictable under such issuances at the expense of being higher on average. Our findings call into question the view that GDP-linked bonds tame debt.

Suggested Citation

  • Sarah Mouabbi & Jean-Paul Renne & Jean-Guillaume Sahuc, 2020. "Taming Debt: Can GDP-Linked Bonds Do the Trick?," Working Papers hal-04159700, HAL.
    • Handle: RePEc:hal:wpaper:hal-04159700
    Note: View the original document on HAL open archive server: https://hal.science/hal-04159700
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    Cited by:

    1. is not listed on IDEAS
    2. Eguren Martin, Fernando & Meldrum, Andrew & Yan, Wen, 2021. "No-Arbitrage pricing of GDP-Linked bonds," Journal of Banking & Finance, Elsevier, vol. 126(C).

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    Keywords

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    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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