We argue in this paper that cancelling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. We claim that debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument. Based on this idea, we present one of the lending scheme that could be applied to the poorest countries and calibrate the cost that would have to be borne by the creditors, were they to incorporate contingencies clause in their lending strategy.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6024.
Cohen, Daniel & Jacquet, Pierre & Reisen, Helmut, 2007.
"Loans or Grants?,"
Working Papers
UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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Find related papers by JEL classification: O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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Paul Collier & P. Guillaumont & S. Guillaumont Jeanneney & Jan Willem Gunning, 1999.
"Reforming Stabex,"
The World Economy,
Blackwell Publishing, vol. 22(5), pages 669-682, 07.
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