Global financial policy makers are studying GDP-indexed bonds as a possible financing tool to reduce the likelihood of governments defaulting on their debt following an economic shock. Proponents argue in favour of the large-scale issuance of such loss-absorbing liabilities to stabilize debt/GDP ratios, while skeptics suggest that such debt would be very expensive to issue — especially as there is no proven market for the securities. A test issuance of GDP-indexed bonds is needed to determine whether they would be an attractive addition to sovereign debt portfolios; policy makers may want to increase attention to the budget-stabilizing benefits of GDP-indexed bonds as well as ancillary benefits. Further technical work is required to support a test issuance of the bonds.
GDP-indexed Bonds: A Way Forward
CIGI Policy Brief No. 97