The Welfare Economics of Debt Service
This paper analyzes some of the implications of the dual transfer a debtor nation must undertake to service foreign debt: (a) an internal transfer from the private sector to the public sector; and (b) an external transfer from the domestic economy to foreign creditors. It shows that, under likely circumstances, a real depreciation of the home currency may complicate the internal transfer. As long as non-traded goods are a net source of revenue for the government, the depreciation called for by debt service deteriorates the public sector's terms of trade vis-a-vis the private sector and magnifies the requisite fiscal retrenchment. The paper discusses the role of trade policy (tariffs and export subsidies) in substituting for devaluation. Generating a private-sector surplus via interest-rate policy is shown to have similar costs on the government budget when the public sector has outstanding domestic debt.
|Date of creation:||Jul 1988|
|Date of revision:|
|Publication status:||published as "The Transfer Problem in Small Open Economies: Exchange Rate and Fiscal Policies for Debt Service," Ricerche Economiche, November 1990.|
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- Sebastian Edwards, 1987.
"Structural Adjustment Policies in Highly Indebted Countries,"
UCLA Economics Working Papers
453, UCLA Department of Economics.
- Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 159-208 National Bureau of Economic Research, Inc.
- Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters, in: Developing Country Debt and the World Economy, pages 249-262 National Bureau of Economic Research, Inc.
- Sebastian Edwards, 1988. "Structural Adjustment Policies in Highly Indebted Countries," NBER Working Papers 2502, National Bureau of Economic Research, Inc.
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- Cohen, Daniel, 1988. "The Management of the Developing Countries' Debt: Guidelines and Applications to Brazil," World Bank Economic Review, World Bank Group, vol. 2(1), pages 77-103, January.
- Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
- Jeffrey D. Sachs, 1987. "Trade and Exchange Rate Policies in Growth-Oriented Adjustment Programs," NBER Working Papers 2226, National Bureau of Economic Research, Inc.
- Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
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