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The Dynamic Implications of Debt Relief for Low-Income Countries

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Author Info

  • Ales Bulir
  • Alma Romero-Barrutieta
  • Jose Daniel Rodríguez-Delgado

Abstract

The effects of debt relief on incentives to accumulate debt, consume, and invest are an important concern for donors and recipients. Using a dynamic stochastic general equilibrium model of a small open economy with a minimum consumption requirement and an endogenous relief probability, we show that excessive debt accumulation is consistent with an anticipation of a future debt relief. Simulations of the calibrated model using 1982-2006 Ugandan data suggest that debt-relief episodes are likely to have only a temporary impact on the level of debt in low-income countries, while being associated with more consumption and less invesment. The long-run debt-to-GDP ratio is estimated to be about twice as high with debt relief than without it.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/157.

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Length: 26
Date of creation: 01 Jul 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/157

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Keywords: Debt relief; Debt problems; Economic models; External debt; Heavily indebted poor countries; HIPC Initiative; Low-income developing countries; debt; debt-relief; interest; relief mechanism; domestic debt; debt outstanding; creditors; loans; debts; relief mechanisms; multilateral debt; debt ratio; debt problem; debt overhang; debt service; debt sustainability; commercial borrowing; debt stocks; debt accumulation; debt restructuring; debt reduction; debt relief mechanism; official creditors; domestic debt markets; national debt; debt management; payments; repayment; excessive borrowing; net debt; debt relief initiative; debt burden; multilateral debt relief; debt forgiveness; multilateral creditors; excessive debt; foreign aid; indebted countries; evolution of debt; debt burdens; domestic saving; debtors; external financing; debt ratios; total external debt; traditional debt-relief mechanisms; debt payment; debt forgiven; restructuring; expenditures; foreign borrowing; amount of debt; debt dynamics; soft loans; debt service capacity; debt crisis; balance of payment; debt service burden; commercial loans; international lending;

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References

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  1. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  2. Henry, Peter B. & Arslanalp, Serkan, 2003. "Is Debt Relief Efficient?," Research Papers 1837, Stanford University, Graduate School of Business.
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  12. Junko Koeda, 2006. "A Debt Overhang Model for Low-Income Countries," IMF Working Papers 06/224, International Monetary Fund.
  13. Chauvin, Nicolas Depetris & Kraay, Aart, 2006. "Who gets debt relief ?," Policy Research Working Paper Series 4000, The World Bank.
  14. Francesc Obiols-Homs & Carlos Urrutia, 2004. "Transitional Dynamics and the Distribution of Assets," Macroeconomics 0407020, EconWPA.
  15. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
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