Debt overhang, liquidity constraints and adjustment incentives
AbstractInvestment in most heavily indebted countries has been weak since 1982. Several papers (Krugman, 1988; Corden, 1988; Sachs, 1989) have subsequently established the debt overhang proposition: the existence of a heavy debt burden reduces the incentive to invest.1 This proposition has given an important rationale for the 1989 shift in international debt management, emphasizing debt relief rather than new money for problem debtors. This paper will raise doubts against the debt overhang proposition: Its analytical implications are found to be ambiguous, its empirical content is found to be weak. We conclude, that investment in the average debtor country is likely to benefit more from new lending than from debt reduction.
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 432.
Date of creation: 1990
Date of revision:
Other versions of this item:
- Bert Hofman & Helmut Reisen, 1990. "Debt Overhang, Liquidity Constraints and Adjustment Incentives," OECD Development Centre Working Papers 32, OECD Publishing.
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- W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
- Philippe Callier, 1989. "Debt Relief and Adjustment Incentives in a Financially Open Economy: Comment on Corden," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 514-522, June.
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- Bert Hofman & Helmut Reisen, 1991. "Some evidence on debt-related determinants of investment and consumption in heavily indebted countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 127(2), pages 281-299, June.
- Warner, Andrew M., 1993. "Did the debt crisis or declining oil prices cause Mexico's investment collapse?," Policy Research Working Paper Series 1102, The World Bank.
- Helmut Reisen, 1991. "The Brady Plan and adjustment incentives," Intereconomics: Review of European Economic Policy, Springer, vol. 26(2), pages 69-73, March.
- Kumar, Saten & Paradiso, Antonio, 2011. "Assessing Sustainability of the Irish Public Debt," MPRA Paper 35295, University Library of Munich, Germany.
- Klodt, Henning, 1990. "Government support for restructuring the East German economy," Kiel Working Papers 450, Kiel Institute for the World Economy.
- Yilmaz Akyüz, 2007. "Debt Sustainability in Emerging Markets: A Critical Appraisal," Working Papers 61, United Nations, Department of Economics and Social Affairs.
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