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Reviving the Case for GDP-Indexed Bonds

Author

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  • Eduardo Borensztein
  • Paolo Mauro

Abstract

This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds. We simulate the effects of GDP-indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood that debt/GDP paths become explosive. The insurance premium would likely be small, because cross-country comovement of GDP growth rates is low and cross-country GDP growth risk is thus largely diversifiable for an investor holding a portfolio of GDP-indexed bonds. Potential obstacles to the emergence of a market for these bonds include the verifiability of GDP data, the trade-off between insurance and moral hazard, and the need for liquidity. The paper discusses institutional fixes and suggests an approach to attempting to start up a market.

Suggested Citation

  • Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
  • Handle: RePEc:imf:imfpdp:02/10
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    Cited by:

    1. Schröder, Michael & Heinemann, Friedrich & Kruse, Susanne & Meitner, Matthias, 2004. "GPD-linked Bonds as a Financing Tool for Developing Countries and Emerging Markets," ZEW Discussion Papers 04-64, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
    3. Miguel Braun & Luciano Di Gresia, 2003. "Towards Effective Social Insurance in Latin America: The Importance of Countercyclical Fiscal Policy," IDB Publications (Working Papers) 1463, Inter-American Development Bank.
    4. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2014. "Public Sector Funding and Debt Management: A Case for GDP-Linked Ṣukūk," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 185-216.
    5. Horacio Sapriza & Filippo Taddei & Guido Sandleris, 2008. "Indexed Sovereign Debt: An Applied Framework," 2008 Meeting Papers 1064, Society for Economic Dynamics.
    6. David A. Grigorian, 2003. "On the Determinants of First-Time Sovereign Bond Issues," IMF Working Papers 03/184, International Monetary Fund.
    7. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
    8. Hossein Askari & Abbas Mirakhor, 2014. "Risk sharing, public policy and the contribution of Islamic finance," PSL Quarterly Review, Economia civile, vol. 67(271), pages 345-379.
    9. Helmut Stix, 2004. "The Impact of ATM Transactions and Cashless Payments on Cash Demand in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 90-105.
    10. Guido Sandleris & Filippo Taddei, 2007. "Indexed Sovereign Debt: a Survey and a Framework of Analysis," Carlo Alberto Notebooks 66, Collegio Carlo Alberto.
    11. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
    12. Robert J. Shiller, 2004. "Radical Financial Innovation," Cowles Foundation Discussion Papers 1461, Cowles Foundation for Research in Economics, Yale University.
    13. Miguel Braun & Luciano di Gresia, 2003. "Hacia un sistema de seguro social eficaz en América Latina: la importancia de una política fiscal anticíclica," Research Department Publications 4334, Inter-American Development Bank, Research Department.
    14. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
    15. Ken Miyajima, 2006. "How to Evaluate GDP-Linked Warrants; Price and Repayment Capacity," IMF Working Papers 06/85, International Monetary Fund.
    16. Christophe Destais, 2017. "Are State-Contingent Sovereign Bonds the Solution to Avoid Government Debt Crisis?," CEPII Policy Brief 2017-19, CEPII research center.
    17. Misa Tanaka, 2006. "Bank Loans Versus Bond Finance: Implications for Sovereign Debtors," Economic Journal, Royal Economic Society, vol. 116(510), pages 149-171, March.
    18. Michael Schröder & Friedrich Heinemann & Susanne Kruse & Matthias Meitner, 2007. "Pay high in good times, pay low in bad times," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(5), pages 667-683.
    19. Eduardo Levy Yeyati, 2004. "Dollars, Debt and the IFIs: Dedollarizing Multilateral Lending," Business School Working Papers dedollmultlending, Universidad Torcuato Di Tella.
    20. Abbas Mirakhor & Iqbal Zaidi, 2006. "Foreign Currency Deposits and International Liquidity Shortages in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(1), pages 49-85.
    21. Morris Goldstein, 2003. "Debt Sustainability, Brazil, and the IMF," Working Paper Series WP03-1, Peterson Institute for International Economics.
    22. Michael Keen & Paul K. Freeman & Muthukumara Mani, 2003. "Dealing with Increased Risk of Natural Disasters; Challenges and Options," IMF Working Papers 03/197, International Monetary Fund.
    23. Barry Eichengreen, 2003. "Restructuring Sovereign Debt," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 75-98, Fall.
    24. Wilson Au-Yeung & Jason McDonald & Amanda Sayegh, 2006. "Australian Government Balance Sheet Management," NBER Working Papers 12302, National Bureau of Economic Research, Inc.

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