The Dynamic Implications of Debt Relief for Low-Income Countries

Ales Bulir, Alma Romero-Barrutieta and Jose Daniel Rodríguez-Delgado

No 2011/157, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; debt forgiveness; debt-to-GDP ratio; interest rate; Debt relief; general equilibrium model; small open economy; donor debt-relief policy; productivity shock; debt-relief rule; probability value; debt-relief probability; debt-relief lottery; debt-relief shock; debt-relief scenario; policy rule; Consumption; Productivity; Disposable income; Sub-Saharan Africa; debt-relief episode; debt-relief function; IMF Institute (search for similar items in EconPapers)
Pages: 26
Date: 2011-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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