Financial Sector Inefficiencies and the Debt Laffer Curve

23 Pages Posted: 20 Apr 2016

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Joshua Aizenman

National Bureau of Economic Research (NBER)

Date Written: May 7, 2002

Abstract

Agénor and Aizenman analyze the implications of inefficient financial intermediation for debt management using a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts. Their analysis shows that lower expected productivity, higher contract enforcement and verification costs, or higher volatility of productivity shocks may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable output and welfare losses. The main implication of this analysis is that debt relief may generate little welfare gains unless it is accompanied by reforms aimed at reducing financial sector inefficiencies.

This paper - a product of the Economic Policy and Poverty Reduction Division, World Bank Institute - is part of a larger effort in the institute to understand the macroeconomic effects of financial sector inefficiencies.

Suggested Citation

Agenor, Pierre-Richard and Aizenman, Joshua, Financial Sector Inefficiencies and the Debt Laffer Curve (May 7, 2002). World Bank Policy Research Working Paper No. 2842. Available at SSRN: https://ssrn.com/abstract=636190

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Joshua Aizenman

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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