Description:
<jats:title>Abstract</jats:title>
<jats:p>This paper provides a tractable framework to assess how the structure of debt instruments – specifically by currency denomination and indexation to GDP – can raise the debt limit of a sovereign. By calibrating the model to different country fundamentals, it is clear that there is no 'one-size-fits-all' approach to optimal instrument design. For instance, low income countries may find benefit in issuing local currency debt; while in advanced economies, debt tolerance can be substantially enhanced through issuing GDP-linked bonds. By looking at the marginal impact of these instruments, the paper also provides insight into the optimal portfolio composition.</jats:p>