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How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico

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  • Arrau, Patricio

Abstract

Most economists and specialists in international finance believe that the debt crisis hurts macroeconomic performance, particularly discouraging investment and growth oriented structural reforms. Identifiying the link between the foreign debt overhang and macroeconomic performance is essential for assessing what creditors and debtors have to gain from alternative debt solutions. Having set up a neoclassical growth model to study the impact of the debt crisis on investment and growth, the author concludes : a) the best case for growth is given by inflation financing; the worst case, by national debt financing. In between are different combinations of income taxation and capital income taxation; and b) growth oriented reforms can increase the present value repayment by several percentage points of GDP. If these reforms are negotiated in the context of a debt reduction agreement, the secondary market discount for the remaining debt can be substantially reduced.

Suggested Citation

  • Arrau, Patricio, 1990. "How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico," Policy Research Working Paper Series 378, The World Bank.
    • Handle: RePEc:wbk:wbrwps:378
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    References listed on IDEAS

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    1. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
    2. Arrau, Patricio, 1989. "Human capital and endogenous growth in a large scale life cycle model," Policy Research Working Paper Series 342, The World Bank.
    3. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, vol. 82(5), pages 1177-1198, December.
    4. Abel, Andrew B., 1990. "Consumption and investment," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 14, pages 725-778, Elsevier.
    5. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
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    1. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    2. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115(3), pages 403-446.
    3. Ion MOROZNIUC, 2017. "Trends In National Bank Of Moldova' Policy Making," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 2(1), pages 87-108.
    4. Kaminsky, Graciela L. & Pereira, Alfredo, 1996. "The debt crisis: lessons of the 1980s for the 1990s," Journal of Development Economics, Elsevier, vol. 50(1), pages 1-24, June.
    5. Balazs Szentes & Natalia Kovrijnykh, 2005. "A Theory of Debt Overhang and Buyback," 2005 Meeting Papers 447, Society for Economic Dynamics.

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