The Welfare Economics of Debt Service

31 Pages Posted: 16 Jul 2004

See all articles by Dani Rodrik

Dani Rodrik

Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: July 1988

Abstract

This paper analyzes some of the implications of the dual transfer a debtor nation must undertake to service foreign debt: (a) an internal transfer from the private sector to the public sector; and (b) an external transfer from the domestic economy to foreign creditors. It shows that, under likely circumstances, a real depreciation of the home currency may complicate the internal transfer. As long as non-traded goods are a net source of revenue for the government, the depreciation called for by debt service deteriorates the public sector's terms of trade vis-a-vis the private sector and magnifies the requisite fiscal retrenchment. The paper discusses the role of trade policy (tariffs and export subsidies) in substituting for devaluation. Generating a private-sector surplus via interest-rate policy is shown to have similar costs on the government budget when the public sector has outstanding domestic debt.

Suggested Citation

Rodrik, Dani, The Welfare Economics of Debt Service (July 1988). NBER Working Paper No. w2655. Available at SSRN: https://ssrn.com/abstract=439581

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