Government bonds with floating coupon rate derived from country’s sustainable growth indicators

Abstract

The paper attempts to make a sustainbale GDP indictor. We have studied certain factors that affect GDP and inflation of a country. We agree that there is a persistence in inflation and that it is difficult to estimate output gap. We attempt to explain that output gap might not be the only factor explaining inflation as it would be dependant on exogenous terms as well. This is an academic exercise and there are lots of limitations in our work. We aim to design coupons that are linked to our GDP indicator with a inflation bound. This is our expected inflation bound, which lies in a determined zone. If inflation falls, or stays above this zone, the bond value falls. The purpose of this bond is to ensure that Governemnts are kept under check. Any policy that leads to inflationary GDP growth will lead to coupons value getting lowered while if inflation falls too much and we deisgn the coupon value to fall. A developing country like India would require Govenrment to take infrastructure development, this would have high costs with returns in future. Thus, governemnts would need to resort to deficit financing for which such bonds would be issued. We saw in the current crisis that excessive Debt to GDP, causes financial risks in a country. The coupon related GDP bond aims to be an effective check on the fiscal discipline of the country. It would be difficult for the country to raise money if the forward looking GDP estimators don’t look good. Thus making it imperative on the government to ensure structutal