The Dynamic Implications of Debt Relief for Low-Income Countries
July 1, 2011
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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
Pages:
26
Volume:
2011
DOI:
Issue:
157
Series:
Working Paper No. 2011/157
Stock No:
WPIEA2011157
ISBN:
9781455293711
ISSN:
1018-5941
