Loans or Grants?

Daniel Cohen, Pierre Jacquet and Helmut Reisen

No UNU-WIDER Research Paper DP2007/06, Working Papers from World Institute for Development Economic Research (UNU-WIDER)

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. 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.

Keywords: grants; loans; developing countries (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2007
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