Is the discount on the secondary market a case for ldc debt relief ?
In 1988, the prices on the secondary market of LDC debt averaged 50 cents per dollar of face value. From the observation of such discount, this paper goes one step further and argues thatthe debt should be written down in order to account for the discrepancy between the face and market value of the debt. The paper is structured as follows. Section 1 spells out the model, section 2 calculates the socially efficient and the post-default growth rates of the economy. Section 3 shows that the lenders, if they were to monitor the investment and the consumption strategy of the borrower, would choose a lower investment strategy than the socially efficient one. Section 4 shows how an optimum rescheduling can achieve the equilibrium described in section 3. Section 5 shows the dynamic inconsistency of the optimal strategy spelled out in section 4, and shows the link with the"debt overhang"literature. Section 6 investigates the empirical relevance of the"debt overhang".
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|Date of creation:||1988|
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- Jeremy A.Rogoff Bulow & Kenneth, 1986.
"A Constant Recontracting Model of Sovereign Debt,"
University of Chicago - George G. Stigler Center for Study of Economy and State
43, Chicago - Center for Study of Economy and State.
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- Sachs, J. & Huizinga, H.P., 1987.
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Other publications TiSEM
ada14007-7229-4f6d-a016-f, Tilburg University, School of Economics and Management.
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NBER Working Papers
2138, National Bureau of Economic Research, Inc.
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in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472
National Bureau of Economic Research, Inc.
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- Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
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