We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. Three results stand out: (i) GDP-linked bond prices would embed sizeable and time-varying risk premiums of about 40 basis points, (ii) for a fixed budget surplus, issuing GDP-linked...

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macrofinance model. Three results stand out. First, GDP-linked bond prices would embed sizeable and timevarying risk premiums of about 40 basis points. Second, for a fixed budget surplus, issuing GDPlinked...

ABSTRACT. We study the debt-stabilizing properties of indexing debt to GDP using a consumptionbased macro-finance model. To this end, we derive quasi-analytical pricing formulas for any type of bond/equity by exploiting the discretization of the state-space, making large-scale simulations...