How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico
Most economists and specialists in international finance believe that the debt crisis hurts macroeconomic performance, particularly discouraging investment and growth oriented structural reforms. Identifiying the link between the foreign debt overhang and macroeconomic performance is essential for assessing what creditors and debtors have to gain from alternative debt solutions. Having set up a neoclassical growth model to study the impact of the debt crisis on investment and growth, the author concludes : a) the best case for growth is given by inflation financing; the worst case, by national debt financing. In between are different combinations of income taxation and capital income taxation; and b) growth oriented reforms can increase the present value repayment by several percentage points of GDP. If these reforms are negotiated in the context of a debt reduction agreement, the secondary market discount for the remaining debt can be substantially reduced.
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