OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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Issuing GDP-linked bonds

Supply and demand can match

This paper compares supply and demand to assess to what extent there can be a market for GDP-linked bonds (GLBs). For the government side, simulations illustrate the debt-stabilisation property of GLBs. These simulations consider shock persistence with a VAR structure and large events with shocks drawn from the residuals. Countries where shock persistence and the standard deviation of the interest rate – growth rate differential scaled with the debt level are higher reap more benefits from GLBs and hence can accept a larger risk premium on GLBs. For the investors’ side, risk premia compensating for GDP volatility are calculated with a CAPM, considering not only the size of growth shocks and their correlation with market prices, but also their persistence. Calculations are made with simplifying assumptions going against the case of GLBs: in particular, the possible reduction in the default risk premium is ignored. Even so, both high-risk and low-risk countries can benefit from GLBs: the ones that have to pay a larger risk premium are those that need this insurance against debt crises the most.


Keywords: public debt, asset pricing, euro area, GDP-linked bonds
JEL: H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt; G12: Financial Economics / General Financial Markets / Asset Pricing; Trading volume; Bond Interest Rates
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