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The debt crisis: lessons of the 1980's for the 1990's

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  • Graciela L. Kaminsky
  • Alfredo Pereira

Abstract

One of the salient characteristics of the 1980s is the growth collapse of the Latin American debtor countries. The debt-overhang literature claims that the debt crisis is the main reason for the growth collapse. However, previous empirical work has failed to support this hypothesis. We reexamine this hypothesis further using simulation and econometric methods. We find that once we account for the effects of social inequality on government policy and consumption, the burden of servicing the debt becomes an important factor in explaining the collapse in investment and output growth in Latin America. We draw some conclusions for the 1990s.

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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 481.

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Date of creation: 1994
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Handle: RePEc:fip:fedgif:481

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Keywords: Capital ; Debt;

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References

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  1. Rudiger Dornbusch & Juan Carlos de Pablo, 1989. "Debt and Macroeconomic Instability in Argentina," NBER Chapters, in: Developing Country Debt and the World Economy, pages 37-56 National Bureau of Economic Research, Inc.
  2. Carmen Reinhart & Guillermo Calvo & Leonardo Leiderman, 1992. "Capital Inflows to Latin America," IMF Working Papers 92/85, International Monetary Fund.
  3. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  4. Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June.
  5. John H. Cochrane, 1988. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc.
  6. Jeffrey D. Sachs, 1989. "Social Conflict and Populist Policies in Latin America," NBER Working Papers 2897, National Bureau of Economic Research, Inc.
  7. Carlos F. Diaz-Alejandro, 1984. "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 335-403.
  8. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
  9. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
  10. Borensztein, Eduardo, 1990. "Debt overhang, credit rationing and investment," Journal of Development Economics, Elsevier, vol. 32(2), pages 315-335, April.
  11. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
  12. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  13. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  14. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  15. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  16. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  17. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  18. Arrau, Patricio, 1990. "How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico," Policy Research Working Paper Series 378, The World Bank.
  19. Jose De Gregorio, 1991. "Economic Growth in Latin America," IMF Working Papers 91/71, International Monetary Fund.
  20. Cohen, Daniel, 1993. "Growth and external debt," CEPREMAP Working Papers (Couverture Orange) 9302, CEPREMAP.
  21. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  22. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
  23. Ram, Rati, 1986. "Government Size and Economic Growth: A New Framework and Some Evidencefrom Cross-Section and Time-Series Data," American Economic Review, American Economic Association, vol. 76(1), pages 191-203, March.
  24. Robert J. Barro, 1989. "A Cross-Country Study of Growth, Saving, and Government," NBER Working Papers 2855, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Kalteier, Eva-Maria & Posch, Peter N., 2013. "Sovereign asset values and implications for the credit market," Review of Financial Economics, Elsevier, vol. 22(2), pages 53-60.
  2. Dijkstra, Geske & Hermes, Niels, 2001. "The Uncertainty of Debt Service Payments and Economic Growth of HIPCs: Is there a Case for Debt Relief?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link," IMF Working Papers 05/223, International Monetary Fund.
  4. Al-Marhubi, Fahim, 1997. "A note on the link between income inequality and inflation," Economics Letters, Elsevier, vol. 55(3), pages 317-319, September.
  5. Eleftherios Thalassinos & Erginbay Ugurlu & Yusuf Muratoglu, 2012. "Income Inequality and Inflation in the EU," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 127-140.
  6. Knoll, Martin, 2013. "The heavily indebted poor countries and the multilateral debt relief initiative: A test case for the validity of the debt overhang hypothesis," Discussion Papers 2013/11, Free University Berlin, School of Business & Economics.
  7. Reinhart, Carmen & Ostry, Jonathan, 1995. "El ahorro y 1a tasa de interes real en los paises en desarrollo
    [Saving and the Real Interest Rate in Developing Countries]
    ," MPRA Paper 13733, University Library of Munich, Germany.

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