Growth-Indexed Bonds and Debt Distribution: Too Little, Too Costly?

Sovereign state-contingent bonds have rarely been issued despite their theoretical debt stabilization properties. This paper revisits this puzzle by analyzing when growth-indexed bonds are too limited in scale, and when they are too costly, to materially improve debt sustainability. The results show that the benefits of indexation are highly heterogeneous across countries. Under the realistic assumption that 20 percent of the debt stock is indexed, reductions in the upper tail of the debt distribution are modest. Full indexation yields more substantial improvements, especially when combined with an optimal loading on growth. Yet a sustained premium of 100 basis points would still offset most of the gains for many countries. These findings suggest that the debt-stabilization properties of growth-indexed bonds would be limited, unless a large-scale and coordinated effort achieves both broad adoption and low issuance premia.