European Parliament Library

Reviving the Case for GDP-Indexed Bonds, Eduardo Borensztein, Paolo Mauro

Contributor
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
Language
eng
Literary Form
non fiction
Physical Description
1 online resource (25 p.)
Form Of Item
online
Isbn
9780146230486

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