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Interest Rates, Growth and External Debt: The Macroeconomic Impact of Mexico's Brady Deal

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  • Claessens, Stijn
  • Oks, Danel
  • van Wijnbergen, Sweder

Abstract

Interest rates fell sharply after Mexico's Brady deal, and private investment and growth recovered. We show, econometrically, that debt relief influenced the macroeconomy mostly though its favourable impact on uncertainty. While the impact of the variability of the future net transfer is significant, the impact of the net transfer itself is not. Specifically the favourable impact on uncertainty about future exchange rate crises is the dominant explanation of the macroeconomic response to debt relief. These results confirm the beneficial macroeconomic effects of debt relief, but reject the debt overhang hypothesis as a dominant factor.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 904.

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Date of creation: Feb 1994
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Handle: RePEc:cpr:ceprdp:904

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Related research

Keywords: Debt Relief; Debt Uncertainty; Investment and Uncertainty; Uncertainty and Economic Growth;

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References

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  1. DeLong, J Bradford & Eichengreen, Barry, 1992. "The Marshall Plan: History's Most Successful Structural Adjustment Program," CEPR Discussion Papers 634, C.E.P.R. Discussion Papers.
  2. Francesco Giavazzi & Marco Pagano, 1989. "Confidence Crises and Public Debt Management," NBER Working Papers 2926, National Bureau of Economic Research, Inc.
  3. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
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Cited by:
  1. Barbone, Luca & Forni, Lorenzo, 1997. "Are markets learning? : behavior in the secondary market for Brady bonds," Policy Research Working Paper Series 1734, The World Bank.
  2. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," Boston University - Institute for Economic Development 59, Boston University, Institute for Economic Development.
  3. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
  4. de Aghion, Beatriz Armendariz & de Hinestrosa, Patricia Armendariz, 1995. "Debt relief, growth and price stability in Mexico," Journal of Development Economics, Elsevier, vol. 48(1), pages 135-149, October.
  5. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.
  6. Canuto, Otaviano & Pinto, Brian & Prasad, Mona, 2012. "Orderly sovereign debt restructuring : missing in action !," Policy Research Working Paper Series 6054, The World Bank.
  7. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics 83, International Economics Section, Departement of Economics Princeton University,.
  8. Claessens, Stijn & Detragiache, Enrica & Kanbur, Ravi & Wickham, Peter, 1996. "Analytical aspects of the debt problems of heavily indebted poor countries," Policy Research Working Paper Series 1618, The World Bank.

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