Reviving the Case for GDP-Indexed Bonds

Author/Editor:

Eduardo Borensztein ; Paolo Mauro

Publication Date:

September 1, 2002

Electronic Access:

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Disclaimer: This Policy Dicussion Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Policy Discussion Paper No. 2002/010

Subject:

Bonds Debt default Emerging and frontier financial markets External debt Financial crises Financial institutions Financial markets Inflation-indexed bonds

English

Publication Date:

September 1, 2002

ISBN/ISSN:

9781451970173/1564-5193

Stock No:

PPIEA0102002

Pages:

25

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