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Indexed Sovereign Debt: An Applied Framework

  • Guido Sandleris
  • Horacio Sapriza
  • Filippo Taddei

A number of countries have issued sovereign debt instruments indexed to real variables in recent years. This type of contracts could improve risk sharing between debtor countries and international creditors and diminish the probability of occurrence of debt crises. This paper characterizes the optimal features of real indexed sovereign debt contracts in a dynamic stochastic equilibrium framework with incomplete markets. We show that the optimal indexed debt contract should not be studied abstracting from the total portfolio of assets and liabilities of the issuing country. We also show that the optimal contract is similar to an insurance contract, and that a country can replicate it using existing instruments, in particular, a combination of international reserves and GDP-indexed bonds. Calibrating our model to Argentina's economy we find that the welfare gains from introducing indexed debt and allowing asset accumulation could be equivalent to an increase of between 0.1% and 0.5% in certainty equivalent aggregate consumption.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2009-01.

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Length: 25 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:udt:wpbsdt:2009-01
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Web page: http://www.utdt.edu/listado_contenidos.php?id_item_menu=4994

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  9. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1988. "LDC Debt: Forgiveness, Indexation, and Investment Incentives," NBER Working Papers 2541, National Bureau of Economic Research, Inc.
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  13. Jaewoo Lee, 2004. "Insurance Value of International Reserves; An Option Pricing Approach," IMF Working Papers 04/175, International Monetary Fund.
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  19. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  20. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism; Long-Run View of Large International Reserves Hoarding," IMF Working Papers 06/280, International Monetary Fund.
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  22. Buera, Francisco & Nicolini, Juan Pablo, 2004. "Optimal maturity of government debt without state contingent bonds," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 531-554, April.
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