پیامدهای کمی اوراق قرضه ایندکس شده در اقتصادهای کوچک باز

This paper analyzes the macroeconomic implications of real-indexed bonds using a general equilibrium model of a small open economy with financial frictions. Although indexed bonds provide a hedge to income fluctuations and can thereby mitigate the effects of financial frictions, they introduce interest rate fluctuations. Because of this tradeoff, there exists a nonmonotonic relation between the “degree of indexation” (i.e., the percentage of the shock reflected in the return) and the benefits that these bonds introduce. When the nonindexed bond market is shut down and only indexed bonds are available, indexation strengthens the precautionary savings motive, increases consumption volatility and deepens the impact of Sudden Stops for degrees of indexation higher than a certain threshold. When the nonindexed bond market is retained, nonmonotonic relationship between the degree of indexation and the benefits of indexed bonds still remain. Degrees of indexation higher than a certain threshold lead to more volatile consumption than lower degrees of indexation. The threshold degree of indexation depends on the volatility and persistence of income shocks as well as on the relative openness of the economy.

Liability dollarization1 and frictions in world capital markets have played a key role in the emerging-market crises or Sudden Stops. Typically, these crises are triggered by sudden reversals of capital inflows that result in sharp real exchange rate (RER) depreciations and collapses in consumption. For example in 1994, Turkey experienced a Sudden Stop characterized by the following: a 10 percent current account-GDP reversal, 10 percent consumption and GDP drops relative to their trends, and a 31 percent RER depreciation (see Durdu, 2007). In an effort to remedy Sudden Stops and smooth macroeconomic fluctuations, Caballero (2002) and Borensztein and Mauro (2004) propose the issuance of state-contingent debt instruments by emerging-market economies. Caballero (2002) argues that crises in some emerging economies are driven by external shocks (e.g., terms of trade shocks) and that, contrary to their developed counterparts, these economies have difficulty absorbing the shocks as a result of imperfections in world capital markets. He argues that most emerging countries could potentially reduce aggregate volatility in their economies and cut precautionary savings2 if they possessed debt instruments for which returns are contingent on the external shocks that trigger crises. He points out that these type of instruments are not widely used, and hence calls for the creation of an indexed bonds market in which bonds’ returns are contingent on terms of trade or commodity prices (Table 1).3Borensztein and Mauro (2004) argue that GDP-indexed bonds could reduce aggregate volatility and the likelihood of unsustainable debt-to-GDP levels in emerging economies. Table 1. Previous attempts with indexed bonds Country Date issued Indexation clause Note Argentina 1972–1989, 2002– CPI, GDP GDP-indexed payments are granted to the investors as part of debt restructuring Australia 1985–1988 CPI Bosnia and Herzegovina 1990s GDP Issued as part of Brady Plan, VRRs Brazil 1964– CPI Bulgaria 1990s GDP Issued as part of Brady Plan, VRRs Colombia 1967– CPI Costa Rica 1990s GDP Issued as part of Brady Plan, VRRs Chile 1956– CPI Israel 1955– CPI France 1973 Gold Debt servicing cost increased significantly from depreciation of French franc against gold Mexico 1970s Oil Issued as petro-bonos 1990s Oil Issued as part of Brady Plan, VRRs 1989– CPI Turkey 1994– CPI United Kingdom 1975– CPI Venezuela 1990s Oil Issued as part of Brady Plan, VRRs Source: Borensztein and Mauro, 2004, Campbell and Shiller, 1996 and Kopcke and Kimball, 1999. Table options Despite the debates in the academic literature and policy circles regarding the merits of indexation, the existing literature lacks quantitative studies investigating the implications of indexed bonds and an understanding of their key features. This paper aims to fill this gap by introducing indexed bonds into quantitative models of small open economies to analyze the implications of those bonds for macroeconomic fluctuations and Sudden Stops. Can indexed bonds smooth macroeconomic fluctuations or help emerging countries mitigate the detrimental effects of Sudden Stops? Under what type of conditions are their benefits maximized? What type of frictions can those bonds introduce? Does the return structure affect their overall implications? I aim to provide answers to those questions in this paper. The analysis consists of two steps. First, I start with a canonical quantitative one-sector economy in which infinitely lived agents receive persistent endowment shocks and credit markets are perfect but insurance markets are incomplete (henceforth, the frictionless one-sector model). Using this model, I analyze the implications of indexed bonds on the precautionary savings motive, consumption volatility and the co-movement of consumption with income. The reason for initially studying the frictionless one-sector model is that this model is relatively more tractable and deriving the intuitions are easier. In addition, in this set-up, the only borrowing constraint that agents face is the one that they self-impose (i.e., natural debt limit, see Section 2.1 for the definitions). Hence, investigating the direct link between precautionary savings and indexation is feasible. 4 This simpler model, however, is not rich enough to study the implications of indexed bonds on Sudden Stops. Hence, as a second step, I move to a two-sector model, which incorporates financial frictions proposed in the Sudden Stops literature ( Calvo, 1998, Mendoza, 2002, Mendoza and Smith, 2005 and Caballero and Krishnamurthy, 2001; among others). This model (henceforth, the two-sector model with financial frictions) can produce Sudden Stops endogenously through a debt-deflation mechanism similar to Mendoza (2002). Using this framework, I explore the implications of indexed bonds on Sudden Stops and RER fluctuations. My analysis establishes that there exists a nonmonotonic relation between the “degree of indexation” of the bonds (i.e., the percentage of the shock that is passed on to the bonds’ return) and the overall benefits of the bonds on macroeconomic variables. When the nonindexed bonds market is shut down and only indexed bonds are available, indexation reduces precautionary savings, volatility of consumption, and the correlation of consumption with income only if the degree of indexation is lower than a critical value.5 If it is higher than that threshold (as with full-indexation), indexed bonds worsen those macroeconomic variables. These results arise both in a one-sector model with incomplete asset markets but with perfect credit markets (henceforth, the frictionless one-sector model) and in a two-sector model, which incorporates financial frictions proposed in the Sudden Stops literature 6 (henceforth, the two-sector model with financial frictions). In the two-sector model with financial frictions, which provides a suitable framework to study the effects of indexed bonds on Sudden Stops, I find that the overall effect of indexed bonds on Sudden Stops is also nonmonotonic. My sensitivity analysis shows that the threshold degree of indexation depends on the volatility and persistence of income shocks as well as the relative openness of the economy. The quantitative analysis starts with exploring the frictionless one-sector model.7 In this model, when the only available instruments are nonindexed bonds with constant exogenous returns, agents try to insure away income fluctuations with trade balance adjustments. Because insurance markets are incomplete, agents try to self-insure by engaging in precautionary savings. If the returns of the bonds are indexed to the exogenous income shock only, the insurance markets are only partially complete.8 In this set-up, indexation, on one hand, can reduce precautionary savings because it lowers the debt repayments when income realizations are low. Indexation can exacerbate precautionary savings because, when income realizations are high, the implied debt repayments lead to a lower “catastrophic level of income” than what they would be without indexation.9 My analysis shows that for higher values of the degree of indexation, the latter effect is stronger, leading to lower catastrophic income levels. This effect, in turn, creates stronger incentives for agents to build up buffer stock savings. Likewise, a tradeoff on consumption smoothing exists. On one hand, indexation can lower the volatility of consumption by increasing the covariance of the trade balance with income. On the other hand, indexation can increase the volatility of consumption by increasing the volatility of the trade balance (because of the introduction of interest rate fluctuations). This tradeoff creates a nonmonotonic relationship between the degree of indexation and the volatility of consumption. To understand the implications of indexed bonds on Sudden Stops, I introduce them into a two-sector economy, which incorporates financial frictions that can account for the key features of Sudden Stops. In particular, the economy suffers from liability dollarization, and international debt markets impose a borrowing constraint on the small open economy as in Mendoza (2002). This constraint limits debt to a fraction of the economy's total income valued at tradable goods prices. The tradeoffs mentioned in the frictionless one-sector model are preserved in the two-sector model with financial frictions. When indexed bonds are in place, negative shocks can result in a relatively small decline in tradable consumption; as a result, the initial capital outflow is milder and the RER depreciation is weaker than in a case with nonindexed bonds. The cushioning in the RER can help contain the Fisherian debt deflation process. Quantitative analysis of this model suggests, once again, that the degree of indexation needs to be lower than a critical value to smooth Sudden Stops. When indexation is higher than this critical value, initial improvement is short-lived and, the recovery from a Sudden Stop is U-shaped with an initial remedy that is followed by a slow and more painful recovery. My sensitivity analysis suggests that the threshold degree of indexation depends on the persistence and volatility of the exogenous shock triggering Sudden Stops as well as the size of the nontradables sector relative to the tradables sector; this finding suggests that the indexation level that maximizes the benefits of indexed bonds needs to be country-specific. An indexation level that is appropriate for one country in terms of its effectiveness at preventing Sudden Stops may not be effective for another and may even expose that country to a more painful recovery when faced with Sudden Stops. Several studies have explored the costs and benefits of indexed debt instruments in the context of public finance and optimal debt management.10 As mentioned before, Borensztein and Mauro (2004) and Caballero (2002) drew attention to such instruments as possible vehicles to provide insurance benefits to emerging countries. Moreover, Caballero and Panageas (2003) quantified the potential welfare effects of credit lines offered to emerging countries. They used a one-sector model with collateral constraints in which Sudden Stops are exogenous to explore the benefits of such credit lines in smoothing Sudden Stops, interpreting them as akin to indexed bonds. This paper contributes to this literature by modeling indexed bonds explicitly in a dynamic stochastic general equilibrium model in which Sudden Stops are endogenous. Endogenizing Sudden Stops reveals that, depending on the degree of indexation, indexed bonds may imply a slower and more painful recovery from a Sudden Stop, although indexation provides an initial remedy. In addition to the literature mentioned above, this paper is also related to the literature on business cycle fluctuations in small open economies (e.g., Mendoza, 1991, Neumeyer and Perri, 2005, Kose, 2002, Oviedo, 2005 and Uribe and Yue, 2006). The paper makes contributions to this literature from the perspective of analyzing how interest rate fluctuations affect macroeconomic variables. Lastly, this paper is also related on the follow-up studies to the Sudden Stops literature, including Calvo et al. (2003), Durdu and Mendoza (2006), Durdu et al. (2008), Caballero and Panageas (2003), among others. Durdu and Mendoza (2006) explore the quantitative implications of price guarantees offered by international financial organizations on emerging-market assets. They find that these guarantees may induce moral hazard among global investors and conclude that the effectiveness of price guarantees depends on the elasticity of investors’ demand as well as on whether the guarantees are contingent on debt levels. Similarly, in this paper, I explore the potential imperfections that indexation can introduce and derive the conditions under which such a policy could be effective in preventing Sudden Stops. Durdu et al. (2008) uses a similar framework to this one to understand the rationale behind the recent surge in foreign reserve holdings of emerging economies. The next section starts with a description of the models used for the analyses and presents quantitative results. Section 3 provides conclusions and offers extensions for further research.

In this paper, I explored the quantitative implications of indexed bonds in various quantitative models of small open economies. I evaluated the implications of indexed bonds in two steps. First, I studied the effects of bonds indexed to output in a canonical one-sector infinite-horizon small open economy model with varying degrees of indexation. The introduction of indexed bonds partially completes the insurance market in such an economy. When the nonindexed bond market is shut down and only indexed bonds are available, indexation reduces precautionary savings, volatility of consumption, and correlation of consumption when the degree of indexation is lower than a critical value. When this degree is higher than that threshold (as with full-indexation, for example), indexation can, in fact, macroeconomic fluctuations can get worsened. Increase in the variance of trade balance (resulting from higher interest rate fluctuations) outweighs the improvement in the covariance of trade balance with income, which then lead to higher volatility of consumption; catastrophic income levels decreases, which in turn leads to an increase in precautionary savings. When the indexed bonds market is retained, the nonmonotonic relationship between the degree of indexation and the benefits of indexed bonds still remains. In the second step, I analyzed the role of indexed bonds in smoothing Sudden Stops and RER fluctuations. Indexed bonds can reduce the initial capital outflow in the event of an exogenous shock that, otherwise, triggers a Sudden Stop in an economy with only nonindexed bonds. Indexed bonds can, in turn, reduce the depreciation in the RER and break the Fisherian debt deflation mechanism. Once again, however, the benefit of those bonds depends critically on the degree of indexation. When the level of indexation is lower than a critical value, indexed bonds weaken Sudden Stops. If indexation is higher than this critical value, indexed bonds can provide some temporary relief in the event of a negative shock, but the initial improvement is short lived, and recovery to pre-crisis is slow and more painful. To conclude, the degree of indexation is a critical variable that determines the overall benefits that indexation introduces, and that a critical value of this variable, which maximizes the benefit of indexation (i.e., optimal degree of indexation) exists. This threshold value depends on the persistence and the volatility of the exogenous shocks a given country experiences as well as on the size of the country's nontradables sector relative to its tradables sector (i.e., the openness of the country). Hence, in terms of policy implications, my analysis reveals that the degree of indexation is a key variable that should optimally be chosen to smooth Sudden Stops; moreover this value should be country specific. In my analysis, I assumed that investors are risk neutral and that indexing debt repayments would not require them to obtain country specific information. Indexed returns, however, may affect investors’ incentives to collect country specific information. The implications of introducing risk-averse investors or informational costs in a dynamic framework are left for future research. The model also can be used to explore the implications of indexation to the relative price of nontradables, or to the CPI, but that is also left for further research.