Sovereign Debt Relief Schemes and Welfare
20 Pages Posted: 15 Feb 2006
Date Written: March 1992
This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results.
JEL Classification: F34
Suggested Citation: Suggested Citation