The Dynamic Implications of Debt Relief for Low-Income Countries

The effects of debt relief on incentives to accumulate debt, consume, and invest are an important concern for donors and recipients. Using a dynamic stochastic general equilibrium model of a small open economy with a minimum consumption requirement and an endogenous relief probability, we show that excessive debt accumulation is consistent with an anticipation of a future debt relief. Simulations of the calibrated model using 1982-2006 Ugandan data suggest that debt-relief episodes are likely to have only a temporary impact on the level of debt in low-income countries, while being associated with more consumption and less invesment. The long-run debt-to-GDP ratio is estimated to be about twice as high with debt relief than without it.
Publication date: July 2011
ISBN: 9781455293711
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , debt , debt-relief , interest , relief mechanism , domestic debt , debt outstanding , creditors , loans , debts , relief mechanisms , multilateral debt , debt ratio , debt problem , debt overhang , debt service , debt sustainability , commercial borrowing , debt stocks , debt accumulation , d

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