Designing Growth-Indexed Bonds When Interest Rates Are Low

Our recent Policy Brief [pdf] focuses on the benefits of growth-indexed bonds for a country’s solvency, by reporting the evolution of the debt-to-GDP ratio. In a world of perfect markets, only solvency would matter, but in practice, the time pattern of cash flows is likely to be crucial, for two reasons. First, debt crises are often triggered by refinancing difficulties. Second, smoother cash flows are likely to give more room for governments to use countercyclical fiscal policy. These considerations raise several interesting issues for designing growth-indexed bonds, particularly in an environment of low nominal interest rates. Read more

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