DP904 | Interest Rates, Growth and External Debt: The Macroeconomic Impact of Mexico's Brady Deal

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Interest rates fell sharply after Mexico's Brady deal, and private investment and growth recovered. We show, econometrically, that debt relief influenced the macroeconomy mostly though its favourable impact on uncertainty. While the impact of the <MI>variability<D> of the future net transfer is significant, the impact of the net transfer itself is not. Specifically <MI>the favourable impact on uncertainty about future exchange rate crises<D> is the dominant explanation of the macroeconomic response to debt relief. These results confirm the beneficial macroeconomic effects of debt relief, but reject the debt overhang hypothesis as a dominant factor.