Evidence for the ineffectiveness of debt rescheduling as a policy instrument

Katy Cornwell and Brett Inder

Applied Economics, 2007, vol. 39, issue 17, 2269-2278

Abstract: Where an economy cannot meet its external debt service obligations, it is forced to appeal to creditors for rescheduling of the debt. As such, rescheduling is evidence of a country's incapacity to carry a debt burden. This article explores factors that explain the probability of a country requiring debt rescheduling in a panel framework. The current literature is extended by modelling a dynamic random effects panel probit, in order to identify a presence of state dependence after controlling for country heterogeneity. We find clear evidence of state dependence when a 2-year lag of the dependent variable is allowed for, suggesting that overall, the fact that a country has experienced a rescheduling arrangement in the past does indeed make them more likely to experience further rescheduling. The article stresses that in order to draw the appropriate policy conclusions from this finding, one must understand that the debt rescheduling variable is itself a policy response variable. The fact that further rescheduling is often required within 2 years of a previous action suggests that rescheduling as it took place in the 1980s and 1990s was an inadequate response that often did little to help countries move beyond their current debt crisis.

Date: 2007
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DOI: 10.1080/00036840600707175

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