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Debt overhang, liquidity constraints and adjustment incentives

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  • Hofman, Bert
  • Reisen, Helmut

Abstract

Investment 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 Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 432.

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Date of creation: 1990
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Handle: RePEc:kie:kieliw:432

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  1. Kenneth A. Froot, 1988. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," NBER Working Papers 2675, National Bureau of Economic Research, Inc.
  2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  3. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  4. W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
  5. Jeffrey D. Sachs, 1989. "Developing Country Debt and Economic Performance. The International Financial System," NBER Chapters, National Bureau of Economic Research, Inc, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages -12 National Bureau of Economic Research, Inc.
  6. 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.
  7. Reisen, Helmut, 1989. "Public debt, North and South," Policy Research Working Paper Series 253, The World Bank.
  8. Jeffrey D. Sachs, 1989. "Introduction to "Developing Country Debt and Economic Performance, Volume 1: The International Financial System"," NBER Chapters, National Bureau of Economic Research, Inc, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 1-36 National Bureau of Economic Research, Inc.
  9. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
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Cited by:
  1. Helmut Reisen, 1991. "The Brady Plan and adjustment incentives," Intereconomics: Review of European Economic Policy, Springer, Springer, vol. 26(2), pages 69-73, March.
  2. 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.
  3. Klodt, Henning, 1990. "Government support for restructuring the East German economy," Kiel Working Papers 450, Kiel Institute for the World Economy.
  4. Kumar, Saten & Paradiso, Antonio, 2011. "Assessing Sustainability of the Irish Public Debt," MPRA Paper 35295, University Library of Munich, Germany.
  5. 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, Springer, vol. 127(2), pages 281-299, June.
  6. Yilmaz Aky├╝z, 2007. "Debt Sustainability in Emerging Markets: A Critical Appraisal," Working Papers, United Nations, Department of Economics and Social Affairs 61, United Nations, Department of Economics and Social Affairs.

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