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Loans or Grants

  • Cohen, Daniel
  • Jacquet, Pierre
  • Reisen, Helmut

We argue in this paper that cancelling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. We claim that debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument. Based on this idea, we present one of the lending scheme that could be applied to the poorest countries and calibrate the cost that would have to be borne by the creditors, were they to incorporate contingencies clause in their lending strategy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6024.

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Date of creation: Jan 2007
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Handle: RePEc:cpr:ceprdp:6024
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  1. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
  2. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  3. Cohen, Daniel, 2001. "The HIPC Initiative: True and False Promises," International Finance, Wiley Blackwell, vol. 4(3), pages 363-80, Winter.
  4. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  5. Daniel Cohen & Thibault Fally & Sébastien Villemot, 2007. "In Favour of a Fund to Stabilise Commodity Exporters' Income," OECD Development Centre Policy Insights 50, OECD Publishing.
  6. Louise Young, 2002. "Determining the Discount Rate for Government Projects," Treasury Working Paper Series 02/21, New Zealand Treasury.
  7. Nunnenkamp, Peter & Thiele, Rainer & Wilfer, Tom, 2005. "Grants versus loans: Much ado about (almost) nothing," Kiel Economic Policy Papers 4, Kiel Institute for the World Economy (IfW).
  8. Reisen, Helmut & Soto, Marcelo, 2001. "Which Types of Capital Inflows Foster Developing-Country Growth?," International Finance, Wiley Blackwell, vol. 4(1), pages 1-14, Spring.
  9. Ratha, Dilip, 2001. "Complementarity between multilateral lending and private flows to developing countries : some empirical results," Policy Research Working Paper Series 2746, The World Bank.
  10. Iman Sugema & Anis Chowdhury, 2005. "Aid and Fiscal Behaviour in Indonesia: The case of a lazy government," Centre for International Economic Studies Working Papers 2005-06, University of Adelaide, Centre for International Economic Studies.
  11. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  12. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  13. Matthew Odedokun, 2004. "Multilateral and Bilateral Loans versus Grants: Issues and Evidence," The World Economy, Wiley Blackwell, vol. 27(2), pages 239-263, 02.
  14. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Lisa CHAUVET & Pierre JACQUET & Bertrand SAVOYE, 2003. "Attenuating through Aid the Vulnerability to Price Shocks," Working Papers 200325, CERDI.
  15. Hulya Ulku & Tito Cordella, 2004. "Grants Versus Loans," IMF Working Papers 04/161, International Monetary Fund.
  16. Sanjeev Gupta & Benedict Clements & Emanuele Baldacci & Carlos Mulas-Granados, 2004. "The persistence of fiscal adjustments in developing countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 209-212.
  17. Bulow, Jeremy & Rogoff, Kenneth S., 2005. "Grants versus Loans for Development Banks," Scholarly Articles 11129181, Harvard University Department of Economics.
  18. Alessandro Missale & Silvia Marchesi, 2004. "What does motivate lending and aid to the HIPCs?," International Finance 0411006, EconWPA.
  19. Odedokun, Matthew, 2003. "Economics and Politics of Official Loans versus Grants Panoramic Issues and Empirical Evidence," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  20. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 03/175, International Monetary Fund.
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