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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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File URL: http://www.wiwi.uni-konstanz.de/workingpaperseries/WP_23-Scholl_2013.pdf
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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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