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The Dynamic Implications of Debt Relief for Low-Income Countries

The Dynamic Implications of Debt Relief for Low-Income Countries by Ales Bulir
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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.
International Monetary Fund; July 2011
26 pages; ISBN 9781462332465
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Title: The Dynamic Implications of Debt Relief for Low-Income Countries
Author: Ales Bulir; Alma Romero-Barrutieta; Jose Daniel Rodríguez-Delgado