The Dynamic Implications of Debt Relief for Low-Income Countries

Author/Editor:

Ales Bulir ; Alma Romero-Barrutieta ; Jose Daniel Rodríguez-Delgado

Publication Date:

July 1, 2011

Electronic Access:

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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.

Series:

Working Paper No. 11/157

Subject:

English

Publication Date:

July 1, 2011

ISBN/ISSN:

9781455293711/1018-5941

Stock No:

WPIEA2011157

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

26

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