Boosting fiscal space: the roles of GDP-linked debt and longer maturities
SUMMARY This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under...
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| Veröffentlicht in: | Economic policy 2020-10, Vol.35 (104), p.587-634 |
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| container_title | Economic policy |
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| creator | Kim, Jun Il Ostry, Jonathan D |
| description | SUMMARY
This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits. |
| doi_str_mv | 10.1093/epolic/eiaa024 |
| format | Article |
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This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits.</description><identifier>ISSN: 0266-4658</identifier><identifier>EISSN: 1468-0327</identifier><identifier>DOI: 10.1093/epolic/eiaa024</identifier><language>eng</language><publisher>Oxford: Oxford University Press</publisher><subject>Debt ; Debt service ; Default ; Economic policy ; Finanzpolitik ; Fälligkeit ; GDP ; Gross Domestic Product ; Investors ; Maturity ; Moral hazard ; Risk ; Risk reduction ; Schuldenmanagement ; Short term debt ; Simulation ; Theorie ; Uncertainty ; Öffentliche Schulden</subject><ispartof>Economic policy, 2020-10, Vol.35 (104), p.587-634</ispartof><rights>CEPR, CESifo, Sciences Po, 2021. 2021</rights><rights>CEPR, CESifo, Sciences Po, 2021.</rights><lds50>peer_reviewed</lds50><oa>free_for_read</oa><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c431t-6830f92a0e0bb5967f3d32f73ffed1f1ab440b42fc49e8cbe1480c7e66bf078a3</citedby><cites>FETCH-LOGICAL-c431t-6830f92a0e0bb5967f3d32f73ffed1f1ab440b42fc49e8cbe1480c7e66bf078a3</cites></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><link.rule.ids>314,780,784,1584,27866,27924,27925</link.rule.ids></links><search><creatorcontrib>Kim, Jun Il</creatorcontrib><creatorcontrib>Ostry, Jonathan D</creatorcontrib><title>Boosting fiscal space: the roles of GDP-linked debt and longer maturities</title><title>Economic policy</title><description>SUMMARY
This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits.</description><subject>Debt</subject><subject>Debt service</subject><subject>Default</subject><subject>Economic policy</subject><subject>Finanzpolitik</subject><subject>Fälligkeit</subject><subject>GDP</subject><subject>Gross Domestic Product</subject><subject>Investors</subject><subject>Maturity</subject><subject>Moral hazard</subject><subject>Risk</subject><subject>Risk reduction</subject><subject>Schuldenmanagement</subject><subject>Short term debt</subject><subject>Simulation</subject><subject>Theorie</subject><subject>Uncertainty</subject><subject>Öffentliche Schulden</subject><issn>0266-4658</issn><issn>1468-0327</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2020</creationdate><recordtype>article</recordtype><sourceid>7TQ</sourceid><recordid>eNqFkDtPwzAUhS0EEuWxMltiYkh7_YiTsEGBUqkSDDBHjnNdXNI42MnAvycolRiZzvKdc6SPkCsGcwaFWGDnG2cW6LQGLo_IjEmVJyB4dkxmwJVKpErzU3IW4w4AFJNiRtb33sfetVtqXTS6obHTBm9p_4E0-AYj9ZauHl6TxrWfWNMaq57qtqaNb7cY6F73Q3C9w3hBTqxuIl4e8py8Pz2-LZ-TzctqvbzbJEYK1icqF2ALrgGhqtJCZVbUgttMWIs1s0xXUkIluTWywNxUyGQOJkOlKgtZrsU5uZ52u-C_Box9ufNDaMfLkqey4FJJyUdqPlEm-BgD2rILbq_Dd8mg_NVVTrrKg66xQKcCGt-6-IdnShapEEqMyM2E-KH7b-4HORB4IQ</recordid><startdate>20201001</startdate><enddate>20201001</enddate><creator>Kim, Jun Il</creator><creator>Ostry, Jonathan D</creator><general>Oxford University Press</general><scope>OQ6</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>7TQ</scope><scope>8BJ</scope><scope>DHY</scope><scope>DON</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>20201001</creationdate><title>Boosting fiscal space: the roles of GDP-linked debt and longer maturities</title><author>Kim, Jun Il ; Ostry, Jonathan D</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c431t-6830f92a0e0bb5967f3d32f73ffed1f1ab440b42fc49e8cbe1480c7e66bf078a3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2020</creationdate><topic>Debt</topic><topic>Debt service</topic><topic>Default</topic><topic>Economic policy</topic><topic>Finanzpolitik</topic><topic>Fälligkeit</topic><topic>GDP</topic><topic>Gross Domestic Product</topic><topic>Investors</topic><topic>Maturity</topic><topic>Moral hazard</topic><topic>Risk</topic><topic>Risk reduction</topic><topic>Schuldenmanagement</topic><topic>Short term debt</topic><topic>Simulation</topic><topic>Theorie</topic><topic>Uncertainty</topic><topic>Öffentliche Schulden</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Kim, Jun Il</creatorcontrib><creatorcontrib>Ostry, Jonathan D</creatorcontrib><collection>ECONIS</collection><collection>CrossRef</collection><collection>PAIS Index</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>PAIS International</collection><collection>PAIS International (Ovid)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>Economic policy</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Kim, Jun Il</au><au>Ostry, Jonathan D</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Boosting fiscal space: the roles of GDP-linked debt and longer maturities</atitle><jtitle>Economic policy</jtitle><date>2020-10-01</date><risdate>2020</risdate><volume>35</volume><issue>104</issue><spage>587</spage><epage>634</epage><pages>587-634</pages><issn>0266-4658</issn><eissn>1468-0327</eissn><abstract>SUMMARY
This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits.</abstract><cop>Oxford</cop><pub>Oxford University Press</pub><doi>10.1093/epolic/eiaa024</doi><tpages>48</tpages><oa>free_for_read</oa></addata></record> |
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| identifier | ISSN: 0266-4658 |
| ispartof | Economic policy, 2020-10, Vol.35 (104), p.587-634 |
| issn | 0266-4658 1468-0327 |
| language | eng |
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| source | PAIS Index; Business Source® Complete; Oxford Journals |
| subjects | Debt Debt service Default Economic policy Finanzpolitik Fälligkeit GDP Gross Domestic Product Investors Maturity Moral hazard Risk Risk reduction Schuldenmanagement Short term debt Simulation Theorie Uncertainty Öffentliche Schulden |
| title | Boosting fiscal space: the roles of GDP-linked debt and longer maturities |
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