IMF Working Papers

The Dynamic Implications of Debt Relief for Low-Income Countries

By Ales Bulir, Alma Romero-Barrutieta, Jose Daniel Rodríguez-Delgado

July 1, 2011

Download PDF

Preview Citation

Format: Chicago

Ales Bulir, Alma Romero-Barrutieta, and Jose Daniel Rodríguez-Delgado. The Dynamic Implications of Debt Relief for Low-Income Countries, (USA: International Monetary Fund, 2011) accessed September 19, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Consumption, Debt relief, Disposable income, National accounts, Production, Productivity, Public debt

Keywords: Consumption, Debt forgiveness, Debt relief, Debt-relief episode, Debt-relief function, Debt-relief lottery, Debt-relief probability, Debt-relief rule, Debt-relief scenario, Debt-relief shock, Debt-to-GDP ratio, Disposable income, Donor debt-relief policy, General equilibrium model, IMF Institute, Interest rate, Policy rule, Probability value, Productivity, Productivity shock, Small open economy, Sub-Saharan Africa, WP

Publication Details

  • Pages:

    26

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2011/157

  • Stock No:

    WPIEA2011157

  • ISBN:

    9781455293711

  • ISSN:

    1018-5941