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Debt Relief and the Current Account: An Analysis of the HIPC Initiative

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  • Sebastian Edwards

Abstract

In this paper I develop a model to investigate the connection between debt relief and current account sustainability. This model can be used as a key input in assessing whether a HIPC country's real exchange rate is ‘overvalued,’ and will thus need to go through devaluation. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest external debt to GDP ratios: almost 300 per cent. Nicaragua is the second poorest country in the Western Hemisphere (after Haiti), and for the last decade has relied very heavily on foreign assistance and aid. Moreover, in the last few years Nicaragua has run extremely large current account deficits in excess of 37 per cent of GDP during 1997‐2001 largely financed by grants, donations and migrant remittances.

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  • Sebastian Edwards, 2003. "Debt Relief and the Current Account: An Analysis of the HIPC Initiative," The World Economy, Wiley Blackwell, vol. 26(4), pages 513-531, April.
    • Handle: RePEc:bla:worlde:v:26:y:2003:i:4:p:513-531
    DOI: 10.1111/1467-9701.00535
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    References listed on IDEAS

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    1. Corden, W. Max, 1995. "Economic Policy, Exchange Rates, and the International System," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226115917, December.
    2. Sebastian Edwards, 2003. "Debt relief and fiscal sustainability," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 139(1), pages 38-65, March.
    3. Corden, W M, 1969. "Effective Protective Rates in the General Equilibrium Model: A Geometric Note," Oxford Economic Papers, Oxford University Press, vol. 21(2), pages 135-141, July.
    4. W. M. Corden, 1966. "The Structure of a Tariff System and the Effective Protective Rate," Journal of Political Economy, University of Chicago Press, vol. 74(3), pages 221-221.
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    1. repec:dau:papers:123456789/4089 is not listed on IDEAS
    2. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
    3. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    4. Alexandra Tabova, 2005. "On the feasibility and desirability of GDP-indexed concessional lending," Department of Economics Working Papers 0509, Department of Economics, University of Trento, Italia.
    5. Ferrarini, Benno, 2008. "Proposal for a Contingency Debt Sustainability Framework," World Development, Elsevier, vol. 36(12), pages 2547-2565, December.
    6. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, vol. 32(8), pages 1407-1417, August.

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