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The Dynamic Implications of Debt Relief for Low-Income Countries
Author:
Mr. Ales Bulir
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Alma Romero-Barrutieta null

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Jose Daniel Rodríguez-Delgado null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 157
Language:
English
Publication Date:
01 Jul 2011
DOI:
https://doi.org/10.5089/9781455293711.001
ISBN:
9781455293711
ISSN:
1018-5941
Pages:
26
Keywords:
WP; debt forgiveness; debt-to-GDP ratio; interest rate; Debt relief; general equilibrium model; small open economy; donor debt-relief policy; productivity shock; debt-relief rule; probability value; debt-relief probability; debt-relief lottery; debt-relief shock; debt-relief scenario; policy rule; Consumption; Productivity; Disposable income; Sub-Saharan Africa; debt-relief episode; debt-relief function; IMF Institute
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund