Premium
Foreign Debt and Economic Development
Author(s) -
Christou Costas,
Dellas Harris,
Belessakos Elias
Publication year - 1998
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00083
Subject(s) - debtor , debt , economics , external debt , internal debt , creditor , debt overhang , incentive , senior debt , debt levels and flows , pareto principle , politics , debt to gdp ratio , recourse debt , monetary economics , macroeconomics , international economics , market economy , political science , operations management , law
This paper characterizes the optimal path of foreign public debt that can support politically unanimous (Pareto welfare improving) economic growth under uncertainty. The feasibility of the plan depends on whether the maintenance of political consensus in the debtor country requires additional loans that are high relative to the country’s outstanding debt. If a program is feasible, then the creditors will have an incentive to preserve political support for the plan, in case of adverse developments, by offering debt relief. Unlike the certainty case, where only total debt matters, uncertainty makes also the timing of debt repayments critical for economic development.