On the feasibility of a debt redemption fund

Abstract

We investigate the feasibility of a Redemption Fund (RF) financed through the commitment to transfer future fiscal resources. An RF is an interesting option for countries with high debt-to-gross domestic product (GDP) ratios and weak fundamentals. To limit the recourse to the RF, we show that it may be useful to increase the policy targets on the debt–GDP ratio and the fiscal surplus reducing the cost weights on their deviations. Fiscal surplus and redemption of debt through the fund go hand in hand without substitution between the two. We calibrate the model to the experience of Eurozone countries with high public debt. Fund feasibility concerns the compatibility between the amount of debt transferred to the fund and resources to be transferred in the future. We show that there is a constraint on the amount of future resources to be transferred and the amount of debt redeemed through the fund for weak countries.