The global economy is improving, but the aftermath of the financial crisis has left behind a mountain of government debt, leaving governments less able to rely on fiscal policy to respond to any new crisis. It is important to begin establishing GDP-linked debt now, along the lines described in the new book, so that the biggest risks can be managed, and policymakers can focus on maintaining economic stability.
Debt instruments similar to GDP-linked bonds have been tried, but only when it is already too late: as an emergency component of a post-default restructuring process. Now, countries that are not in crisis have a chance to try the real thing. The biggest step forward will come when advanced countries issue GDP-linked bonds in relatively normal times. That will set the example the rest of the world has been waiting for.
Robert J. Shiller, a 2013 Nobel laureate in economics, is professor of economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of "Irrational Exuberance," the third edition of which was published in January 2015, and, most recently, "Phishing for Phools: The Economics of Manipulation and Deception," co-authored with George Akerlof.