GDP-linked bonds and sovereign default

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 31 January 2014

Working Paper No. 484
By David Barr, Oliver Bush and Alex Pienkowski

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.
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