Thursday, February 17, 2011

Predictive Value Of GDP Linked Bonds

A comment I posted on The Wall Street Journal blog, Real Time Economics, "Worried About U.S. Debt? Shiller Pushes GDP-Linked Bonds" by Javier E. David:
The GDP linked debt would act like an equity/stock of the US economy. The owner of the US GDP debt receives a fixed percentage of future US production of goods and services (GDP). Positive and negative changes in the market price of the debt, after issuance, would be indications of changes in market expectations about future GDP. If the market price of an issued GDP linked bond traded above par, it would indicate an expectation of higher GDP growth and vice versa.

Likewise, over time, there would be older GDP linked bonds with different maturity dates and one could discern the market expected GDP growth rates for future periods.

GDP linked bonds could act as early warning signals of US recessions and economic growth.

Increases in the price volatility of the bonds would indicate the nearing of periods of great economic risk and uncertainty.

And of course, credit must be given to Robert C Merton, who decades ago proposed that the US issue consumption linked bonds. Consumption is large part of US GDP and highly correlated to GDP. Consumption linked bonds would act very much like GDP linked bonds.

1 comment :

  1. Da! If consumption is 70 percent of GDP, do you think it would correlate?