Fiscal adjustment and deficit financing during the debt crisis

William Easterly

No 138, Policy Research Working Paper Series from The World Bank

Abstract: To study the adjustment to the debt crisis, this paper compares the experience of seven"crisis"debtor countries with those of five"noncrisis"debtor countries. In response to a sharp reduction in external capital flows, the crisis countries rescheduled their debt during 1982-87. The noncrisis group avoided debt resheduling during that period and maintained access to external capital. The paper finds that highly indebted countries are probably better off raising conventional taxes and cutting current spending, rather than raising taxes on financial intermediation and cutting public investment. Shifting to sounder policies may require the breathing space only new external financing or debt relief would provide.

Keywords: Economic Stabilization; Public Sector Economics&Finance; Banks&Banking Reform; Strategic Debt Management; Environmental Economics&Policies (search for similar items in EconPapers)
Date: 1989-01-31
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