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How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico

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  • Arrau, Patricio
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    Abstract

    Most economists and specialists in international finance believe that the debt crisis hurts macroeconomic performance, particularly discouraging investment and growth oriented structural reforms. Identifiying the link between the foreign debt overhang and macroeconomic performance is essential for assessing what creditors and debtors have to gain from alternative debt solutions. Having set up a neoclassical growth model to study the impact of the debt crisis on investment and growth, the author concludes : a) the best case for growth is given by inflation financing; the worst case, by national debt financing. In between are different combinations of income taxation and capital income taxation; and b) growth oriented reforms can increase the present value repayment by several percentage points of GDP. If these reforms are negotiated in the context of a debt reduction agreement, the secondary market discount for the remaining debt can be substantially reduced.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 378.

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    Date of creation: 30 Apr 1990
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    Handle: RePEc:wbk:wbrwps:378

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    Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Economic Growth; Financial Intermediation;

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    1. Abel, Andrew B., 1990. "Consumption and investment," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 14, pages 725-778 Elsevier.
    2. Arrau, Patricio, 1989. "Human capital and endogenous growth in a large scale life cycle model," Policy Research Working Paper Series 342, The World Bank.
    3. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, American Economic Association, vol. 82(5), pages 1177-98, December.
    4. Andrew B. Abel, 1985. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc.
    5. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Graciela L. Kaminsky & Alfredo Pereira, 1994. "The debt crisis: lessons of the 1980's for the 1990's," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 481, Board of Governors of the Federal Reserve System (U.S.).

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