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The Dynamic Implications of Debt Relief for Low-Income Countries

Ales Bulir (), Alma Romero-Barrutieta and Jose Daniel Rodriguez-Delgado ()

No 11/157, 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: Debt problems; Debt relief; Economic models; External debt; Low-income developing countries; HIPC Initiative; Heavily indebted poor countries; general equilibrium model, small open economy, debt, debt-relief, interest, relief mechanism, International Lending and Debt Problems, Open Economy Macroeconomics, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-dge
Date: 2011-07-01
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