Loans or Grants

Daniel Cohen, Pierre Jacquet and Helmut Reisen

No 6024, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We argue in this paper that cancelling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. We claim that debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument. Based on this idea, we present one of the lending scheme that could be applied to the poorest countries and calibrate the cost that would have to be borne by the creditors, were they to incorporate contingencies clause in their lending strategy.

Keywords: developing countries; grants; loans (search for similar items in EconPapers)
JEL-codes: O19 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: Written
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Related works:
Working Paper: Loans or Grants? (2007)
Journal Article: Loans or Grants? (2007)
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