The Dynamic Implications of Debt Relief for Low-Income Countries

IMF Working Papers, July 1, 2011

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The Dynamic Implications of Debt Relief for Low-Income Countries

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Bibliographic details

• Authors: Aleš Bulíř, Alma Romero-Barrutieta, Jose Daniel Rodríguez-Delgado
• Published: July 1, 2011
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781455293711.001

Overview

• Title: The Dynamic Implications of Debt Relief for Low-Income Countries
• Authors: Ales Bulir, Alma Romero-Barrutieta, Jose Daniel Rodríguez-Delgado
• Publication date: July 1, 2011
• Main research question: How does debt relief affect incentives to accumulate debt, consume, and invest in low-income countries?

Model and Methodology

• Framework: Dynamic stochastic general equilibrium model of a small open economy.
• Key features:
  • Minimum consumption requirement.
  • Endogenous relief probability (debt-relief probability determined within the model).
• Calibration and data:
  • Simulations calibrated using 1982-2006 Ugandan data.

Key Findings

• Anticipation effects:
  • Excessive debt accumulation is consistent with an anticipation of a future debt relief.
• Short-run vs. long-run dynamics:
  • Debt-relief episodes are likely to have only a temporary impact on the level of debt in low-income countries.
  • Debt-relief episodes are associated with more consumption and less investment.
• Long-run debt level:
  • The long-run debt-to-GDP ratio is estimated to be about twice as high with debt relief than without it.

Policy Implications and Interpretations

• Donor and recipient concerns:
  • Debt relief can alter incentives, encouraging higher consumption and reduced investment following relief episodes.
• Fiscal and debt-management considerations:
  • Policies should account for endogenous relief expectations when designing donor debt-relief frameworks and recipient fiscal rules to mitigate excessive debt accumulation.
• Monitoring and design:
  • The probability and predictability of relief (the debt-relief rule/function) matter for households’ and governments’ intertemporal decisions.

Subject Areas and Keywords

• 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

Content in this bundle

• 6. Macroeconomic Outcomes Under Alternative Relief Scenarios
  • 6. Macroeconomic Outcomes Under Alternative Relief Scenarios (Markdown version)
  • 6. Macroeconomic Outcomes Under Alternative Relief Scenarios (PDF)