GDP-Linked Bonds and Sovereign Default

40 Pages Posted: 2 Feb 2014

See all articles by David Barr

David Barr

Bank of England

Oliver Bush

London School of Economics & Political Science (LSE); Bank of England

Alex Pienkowski

International Monetary Fund

Date Written: January 31, 2014

Abstract

Using a calibrated model of endogenous sovereign default, we explore how GDP-linked bonds can raise the maximum sustainable debt level of a government, and substantially reduce the incidence of default. The model explores both the costs (in particular the GDP risk premium) and the benefits of issuing GDP-linked bonds. It concludes that significant welfare gains can be achieved by indexing debt to GDP.

Keywords: Fiscal policy, contingent pricing, debt management, sovereign debt, sovereign default

JEL Classification: E95, G16, H63

Suggested Citation

Barr, David and Bush, Oliver and Pienkowski, Alex, GDP-Linked Bonds and Sovereign Default (January 31, 2014). Bank of England Working Paper No. 484, Available at SSRN: https://ssrn.com/abstract=2388768 or http://dx.doi.org/10.2139/ssrn.2388768

David Barr

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Oliver Bush (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Alex Pienkowski

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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