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Assessing the Growth-Enhancing Effect of State Contingent Debt Instruments

Author

Listed:
  • Sarah Nandnaba

    (Department of Economics, Ecole normale superieure (ENS) Paris-Saclay, 91190 Gif-sur-Yvette, France)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

Abstract

This paper assesses the growth-enhancing effect of State Contingent Debt Instruments (SCDIs) and uses a panel data set of 7 countries from 1991 to 2021. Exploring this relationship empirically for the first time contributes to understanding SCDIs' impact on debt management and growth promotion. SCDIs' present value exerts a pro-cyclical effect and alleviates the debt burden, significantly promoting Gross Domestic Product (GDP) growth and improving fiscal balance. The share of SCDIs on external debt shows a positive and significant impact on economic growth, suggesting that linking the principal to economic performance can enhance growth. The decrease in SCDIs' present value increases the fiscal surplus, implying that SCDIs contribute to improving fiscal balance.

Suggested Citation

  • Sarah Nandnaba & Rangan Gupta, 2024. "Assessing the Growth-Enhancing Effect of State Contingent Debt Instruments," Working Papers 202426, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202426
    as

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    File URL: http://www.up.ac.za/media/shared/61/WP/wp_2024_26.zp252544.pdf
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    References listed on IDEAS

    as
    1. David Barr & Oliver Bush & Alex Pienkowski, 2014. "GDP-linked Bonds and Sovereign Default," International Economic Association Series, in: Joseph E. Stiglitz & Daniel Heymann (ed.), Life After Debt, chapter 4, pages 246-275, Palgrave Macmillan.
    2. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    4. Caks, John, 1977. "The Coupon Effect on Yield to Maturity," Journal of Finance, American Finance Association, vol. 32(1), pages 103-115, March.
    5. Benford, James & Joy, Mark & Kruger, Mark, 2016. "Sovereign GDP-linked bonds," Bank of England Financial Stability Papers 39, Bank of England.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    State Contingent Debt Instruments; Fiscal Balance; Present Value; Public debt; Debt burden;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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