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Wealth effects of voluntary debt reduction in Latin America

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  • Oks, Daniel

Abstract

This paper formulates a multisectoral accounting framework to assess the potential effects on perceived private wealth of alternative schemes for voluntary debt reduction. Swaps of private equity for public foreign debt increase private wealth when private agents behave ultrarationally, that is, when they regard public foreign debt as discounted future taxes, and when their subjective valuation of foreign debt exeeds its redemption price. With direct buybacks and collateralized debt conversions, private wealth increases when agents behave ultrarationally and their subjective valuation of debt is higher than secondary market prices. Using this framework to examine recent experience in Brazil, Chile and Mexico, the paper concludes that the surge in consumption-GNP ratios - along with record levels of voluntary debt reduction in Brazil, Chile and Mexico in 1988 - is consistent with the hypotheses that private agents have behaved ultrarationally and have valued foreign sector liabilities at more than redemption/secondary market prices.

Suggested Citation

  • Oks, Daniel, 1990. "Wealth effects of voluntary debt reduction in Latin America," Policy Research Working Paper Series 391, The World Bank.
  • Handle: RePEc:wbk:wbrwps:391
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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