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The Case for Growth-Indexed Bonds in Advanced Economies Today

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Listed:
  • Olivier J. Blanchard

    () (Peterson Institute for International Economics)

  • Paolo Mauro

    () (Peterson Institute for International Economics)

  • Julien Acalin

    () (Peterson Institute for International Economics)

Abstract

One of the legacies of the global financial crisis is a high ratio of public debt to GDP. While current levels may be sustainable, another series of bad shocks could easily tip the balance and lead to unsustainable debt ratios and to default. The quantitative exercises presented in this Policy Brief show that growth-indexed bonds can play an important role in that content. By decreasing payments when growth is low, they can substantially reduce the "tail risks" associated with explosive debt paths starting from today's high ratios. The introduction of growth-indexed bonds will benefit highly indebted advanced economies and, in the euro area, might provide a partial market-based solution to attain valuable insurance benefits well ahead of a formal fiscal union.

Suggested Citation

  • Olivier J. Blanchard & Paolo Mauro & Julien Acalin, 2016. "The Case for Growth-Indexed Bonds in Advanced Economies Today," Policy Briefs PB16-2, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb16-2
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    File URL: https://piie.com/publications/policy-briefs/case-growth-indexed-bonds-advanced-economies-today
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    References listed on IDEAS

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    1. Callen, Michael & Imbs, Jean & Mauro, Paolo, 2015. "Pooling risk among countries," Journal of International Economics, Elsevier, vol. 96(1), pages 88-99.
    2. Stefania D'Amico & Don H Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," BIS Working Papers 248, Bank for International Settlements.
    3. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    4. Mauro, Paolo & Romeu, Rafael & Binder, Ariel & Zaman, Asad, 2015. "A modern history of fiscal prudence and profligacy," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 55-70.
    5. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
    6. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," Harvard Business School Working Papers 11-094, Harvard Business School, revised Sep 2013.
    7. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR;CES;MSH, vol. 19(38), pages 165-216, April.
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    Cited by:

    1. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2016. "Waiting for a haircut? A bargaining perspective on sovereign debt restructuring," CEPR Discussion Papers 11710, C.E.P.R. Discussion Papers.

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