Debt Limits and the Structure of Public Debt
Abstract
This paper provides a tractable framework to assess how the structure of debt instruments – specifically by currency denomination and indexation to GDP – can raise the debt limit of a sovereign. By calibrating the model to different country fundamentals, it is clear that there is no 'one-size-fits-all' approach to optimal instrument design. For instance, low income countries may find benefit in issuing local currency debt; while in advanced economies, debt tolerance can be substantially enhanced through issuing GDP-linked bonds. By looking at the marginal impact of these instruments, the paper also provides insight into the optimal portfolio composition.
Acknowledgments
With special thanks to S. Ali Abbas for his guidance and comments on this paper. Thanks also to Sam LaRussa for his research assistance support.
Appendix
Shock Correlations.
| Real GDP (percent change); primary balance (change, percent of GDP) | Real GDP (percent change); real exchange rate (percent change) | Primary balance (change, percent of GDP); real exchange rate (percent change) | |
|---|---|---|---|
| All countries | 0.12 | −0.02 | 0.01 |
| Advanced economies | 0.33 | −0.07 | −0.05 |
| Emerging markets | 0.07 | 0.17 | 0.10 |
| Low income countries | 0.05 | 0.07 | 0.10 |
ACs Growth Shock.
ACs Primary Balance Shock.
ACs Exchange Rate Shock.
AEs Growth Shock.
AEs Primary Balance Shock.
AEs Exchange Rate Shock.
EMs Growth Shock.
EMs Primary Balance Shock.
EMs Exchange Rate Shock.
LICs Growth Shock.
LICs Primary Balance Shock.
LICs Exchange Rate Shock.
ACs Debt Level.
AEs Debt Level.
EMs Debt Level.
LICs Debt Level.
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Articles in the same Issue
- Research Foundation
- Deindustrialization and Unsustainable Debt in Middle-Income Countries: The Case of Puerto Rico
- Articles
- Socioeconomic Driving Forces of International Migration
- Follow the Money: Remittance Responses to FDI Inflows
- On Comprehensively Intermediate Measures of Inequality and Poverty, with an Illustrative Application to Global Data
- Debt Limits and the Structure of Public Debt
