GDP-linked assets

While the idea of introducing GDP-indexed bonds in the form of risk sharing instruments is not new, interest to these assets increases as countries' inability to repay their debt intensifies. This interest peaked with the recent European debt crisis and now resurfaced during the COVID-19 outbreak. This paper quantitatively analyzes the optimal GDP-indexation method with non-contingent asset and GDP-indexed bonds. The gains for the government and investors greatly depend on the underlying indexation method and are highest if investors fully participate in a risk sharing arrangement such that periodic coupons are proportionally linked to GDP developments. Remarkably, these instruments are always sub-optimal if analyzed with one-period debt.