Working Paper: NBER ID: w10903
Authors: Craig Burnside; Domenico Fanizza
Abstract: In this paper we discuss fiscal and monetary policy issues facing heavily-indebted poor countries (HIPCs) who receive debt reduction via the enhanced HIPC initiative. This debt relief program is distinguished from previous ones by its conditionality: freed resources must be used for poverty reduction. We argue that (i) this conditionality severely limits the extent to which the initiative provides significant debt relief; (ii) depending on the response of monetary policy to an increase in social spending there could be a short-run increase in inflation in HIPC countries and (iii) the keys to long-run fiscal sustainability in the HIPCs are significant fiscal reforms by their governments, and the effectiveness of their poverty reduction programs in raising growth.
Keywords: HIPC; debt relief; poverty reduction; fiscal policy; monetary policy
JEL Codes: E31; H63; O11; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| An increase in government spending on poverty reduction (H53) | Inflation rates (E31) |
| The conditionality of the HIPC initiative (F35) | The amount of effective debt relief provided to HIPC countries (F35) |
| Significant fiscal reforms (H69) | Long-run fiscal sustainability (H68) |
| The effectiveness of poverty reduction programs in enhancing growth (O29) | Long-run fiscal sustainability (H68) |