SMP: Shiller on GDP-Linked Bonds

In a recent article, Noble prize-winning economist Robert Shiller makes the case for countries moving from conventional bonds to sovereign GDP-linked bonds. A sovereign GDP-linked bond pays the bondholder only if certain economic conditions hold — for instance, if GDP grows at no less than a certain rate, is above a minimum level, or both.

The main argument in favor of countries issuing GDP-linked bonds is that it will minimize the cost of an economic crisis. If economic conditions deteriorate enough, then the country will limit bond payments without falling into default and will be able to increase spending domestically (instead of transferring money out of the country). Certainly, there are pros to issuing GDP-linked bonds, but there are also cons.

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