DP778 | Growth and External Debt


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This paper surveys the literature on external debt which has developed over the past decade. Initially this literature emphasized the intertemporal nature of the balance of payments, and reflected the view that balance of payments movements were an equilibrium phenomenon reflecting either transitory disturbances or permanent transfers of capital towards the poor countries. Subsequently the literature emphasized the risk of debt repudiation and focused on a theory of optimal credit ceilings imposed on a sovereign debtor. The third stage analysed the effect of a `debt overhang' on domestic investment, and the final stage analysed how sovereign debt could be best reduced.