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Debt relief, growth and price stability in Mexico

Armendariz de Aghion, B.; Armendáriz de Hinestrosa, P.; (1995) Debt relief, growth and price stability in Mexico. Journal of Development Economics , 48 (1) pp. 135-149. 10.1016/0304-3878(95)00032-1.

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Inspired by the negotiation of the foreign debt of Mexico in 1989 this paper provides a framework to show that, prior to debt relief, an LDC government which is indebted both domestically and externally has an additional incentive not to default on its external obligations. However, repayment of the external debt is shown to involve a delicate tradeoff between growth and inflation: on the one hand the government increases its ability to keep domestic interest rates relatively low thereby promoting investment and growth; on the other hand the government worsens the budget-deficit problem thereby introducing additional inflationary pressures. The way to improve this tradeoff is by negotiating a debt relief operation on the foreign debt.

Type: Article
Title: Debt relief, growth and price stability in Mexico
DOI: 10.1016/0304-3878(95)00032-1
Publisher version: http://dx.doi.org/10.1016/0304-3878(95)00032-1
Language: English
Keywords: JEL classification: F34, O11, O16. Debt-relief, risk-premium, inflation, stabilization, growth
UCL classification: UCL > School of Arts and Social Sciences > Faculty of Social and Historical Sciences > Economics
URI: http://discovery.ucl.ac.uk/id/eprint/15043
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