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Debt Relief for Poor Countries: Conditionality and Effectiveness

  • Almuth Scholl


    (Department of Economics, University of Konstanz, Germany)

This paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries. We develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract. Our findings suggest that incentive-compatible conditions substantially promote fiscal reform and investment in the short- and long-run. In contrast to the recent practice of fully canceling multilateral debt, optimal debt relief is characterized by a combination of outright grants and subsidized loans. Losing loans as a policy instrument reduces welfare considerably.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2013-23.

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Length: 37 pages
Date of creation: 29 Oct 2013
Date of revision:
Handle: RePEc:knz:dpteco:1323
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