The Costs of GDP-Linked Securities

Abstract

In the case of borrowers, the overwhelming fear seems to be that they would have to pay more. The quantitative analysis of the previous chapter suggests that this will be low in a well-diversified market. In the case of lenders, there is the analogous fear of buying an unfamiliar instrument, the danger that the instrument might be illiquid, and carries with it acceptance of increased risk (which can be diminished but not eliminated by diversification). Some critics have sought to raise moral hazard concerns, as though countries would stop growing because of the need to share a small part of their gains with their creditors.