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Debt-Stabilizing Properties of GDP-Linked Securities: A Macro-Finance Perspective

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  • Sarah Mouabbi
  • Jean-Paul Renne
  • Jean-Guillaume Sahuc

Abstract

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macrofinance model. Three results stand out. First, GDP-linked bond prices would embed sizeable and timevarying risk premiums of about 40 basis points. Second, for a fixed budget surplus, issuing GDPlinked securities does not necessarily imply more beneficial debt-to-GDP ratios in the medium- to long-run. Third, the debt-stabilizing budget surplus is more predictable under such issuances at the expense of being higher on average. Our findings call into question the view that GDP-linked securities tame debt.

Suggested Citation

  • Sarah Mouabbi & Jean-Paul Renne & Jean-Guillaume Sahuc, 2021. "Debt-Stabilizing Properties of GDP-Linked Securities: A Macro-Finance Perspective," Working papers 844, Banque de France.
    • Handle: RePEc:bfr:banfra:844
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    More about this item

    Keywords

    GDP-linked securities; term structure; consumption-based model; debt stabilization.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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