Working Paper: NBER ID: w2675
Authors: Kenneth A. Froot
Abstract: We compare various forms of market-based debt relief with coordinated debt forgiveness on the part of creditors. These schemes lead to different allocations of resources and levels of debtor and creditor welfare, but all attempt to stimulate debtor investment through reductions in the level of debt. If investment-incentive effects are present, then investment in liquidity-constrained debtors will respond by enough to make a reduction in debt profitable, but not by enough to make the reduction in debt optimal. For these countries the optimal debt-relief package (from the creditors perspective) will include an infusion of new lending.
Keywords: debt relief; liquidity constraints; investment incentives; market-based schemes
JEL Codes: F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high debt levels (F34) | investment incentives (O31) |
| partial forgiveness (Y60) | investment levels (F21) |
| debt relief schemes (F34) | investment responses (G11) |
| liquidity (E41) | investment responses (G11) |
| liquidity constraints (E41) | investment levels (F21) |
| debt relief mechanisms (F34) | welfare of debtors and creditors (G33) |