GDP-linked bonds: why so few, and why so expensive?

With governments around the world facing potential strain to mount responses to COVID-19, state-contingent sovereign debt instruments that would provide automatic debt relief have come to the forefront of policy debates. Francisco Roch and Francisco Roldán propose a framework to understand why such instruments have found limited success so far and propose ways to improve their design.

In response to the COVID-19 pandemic, most economies have implemented large fiscal stimulus programs that pushed public debt to their historical highest levels (Figure 1). These developments have renewed interest in proposals for state-contingent debt instruments as a strategy to reduce the likelihood of future costly debt crises (e.g., IMF 2020). In theory, state-contingent debt instruments that allow a sovereign issuer to reduce payments when times are bad have many benefits: they decrease default risk, reduce cyclicality of fiscal policy, and improve risk sharing (Hatchondo and Martinez, 2012; Bertinatto et al. 2017 *).

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Πηγή: blogs.lse.ac.uk