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Did the debt crisis cause the investment crisis?

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  • Andrew M. Warner

Abstract

There is now a large literature which attributes the investment decline in heavily indebted developing countries to the effects of the international debt crisis which began in 1982. However, these theories have not been tested against the alternative that declining terms of trade and high world real interest rates in the early 1980s directly caused the investment declines. This paper is based on the idea that if the debt theories are true, then forecasts of investment in the 1980s which do not use debt variables should not perform very well. This paper points out that such forecasts perform surprisingly well, and in many cases go against the predictions of the debt theories, casting doubt on the validity of the debt theories.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1991/418/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1991/418/ifdp418.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 418.

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Date of creation: 1991
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Handle: RePEc:fip:fedgif:418

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Keywords: Debt ; Developing countries ; Financial crises;

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  1. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
  2. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
  3. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
  4. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  5. Elhanan Helpman, 1989. "Voluntary Debt Reduction: Incentives and Welfare," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 580-611, September.
  6. Jaime Marquez & Neil R. Ericsson, 1990. "Evaluating the predictive performance of trade-account models," International Finance Discussion Papers 377, Board of Governors of the Federal Reserve System (U.S.).
  7. Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-75, June.
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