Working Paper: CEPR ID: DP904
Authors: Stijn Claessens; Daniel Oks; Sweder van Wijnbergen
Abstract: Interest rates fell sharply after Mexico's Brady deal, and private investment and growth recovered. We show, econometrically, that debt relief influenced the macroeconomy mostly though its favourable impact on uncertainty. While the impact of the variability of the future net transfer is significant, the impact of the net transfer itself is not. Specifically the favourable impact on uncertainty about future exchange rate crises is the dominant explanation of the macroeconomic response to debt relief. These results confirm the beneficial macroeconomic effects of debt relief, but reject the debt overhang hypothesis as a dominant factor.
Keywords: debt relief; debt uncertainty; investment and uncertainty; uncertainty and economic growth
JEL Codes: F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Brady deal (L14) | reduced interest rates (E43) |
| reduced interest rates (E43) | private investment rebound (E22) |
| reduced uncertainty about future exchange rate crises (F31) | private investment rebound (E22) |
| debt relief (F34) | reduced variability of debt service obligations (G32) |
| reduced variability of debt service obligations (G32) | improved economic outcomes (O49) |
| debt relief (F34) | reduced uncertainty about future exchange rate crises (F31) |