The Short and Long Run Effects of Debt Reduction: Evidence From Debt Relief Under the Enhanced HIPC and MDR Initiatives

32 Pages Posted: 14 May 2018

See all articles by Kelsey Gamel

Kelsey Gamel

Baylor University

Van H. Pham

Baylor University - Department of Economics

Date Written: April 27, 2018

Abstract

High levels of government debt depress productive investment in a number of ways. High outstanding debt keeps market interest rates high crowding out private investment. Risk of default reduces incentives to invest or creates adverse selection in the mix of investments. Government revenue must service debt at the expense of investment in infrastructure and education. `Debt overhang' exists when the level of debt is so high that it discourages additional investments to be undertaken. This paper estimates benefits to debt reduction by using the natural experiment provided by the debt relief programs: the Heavily Indebted Poor Countries (HIPC) Initiative launched by the IMF and World Bank in 1996 and the Multilateral Debt Relief Initiative (MDRI) extension in 2005. We apply a time-shifted difference-in-differences strategy to evaluate the effects of this intervention. We found that debt relief increased capital investment as much as 1.63% in the short run and 5.79% in the long run. However, there was no effect on foreign direct investment. Output and school enrollment increased both in the short and long run.

Keywords: Sovereign Debt, Debt Overhang, Debt Relief

JEL Classification: F34, H63, O11, O19

Suggested Citation

Gamel, Kelsey and Pham, Van H., The Short and Long Run Effects of Debt Reduction: Evidence From Debt Relief Under the Enhanced HIPC and MDR Initiatives (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=3169893 or http://dx.doi.org/10.2139/ssrn.3169893

Kelsey Gamel

Baylor University ( email )

Waco, TX 76798
United States

Van H. Pham (Contact Author)

Baylor University - Department of Economics ( email )

One Bear Place #98003
Waco, TX 76798
United States
(254) 710-3521 (Phone)
(254) 710-6142 (Fax)

HOME PAGE: http://www.baylor.edu/van_pham

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