DEBT RELIEF SCHEMES AND WELFARE

This paper shows that concerted debt reduction may be welfare-improvin g even when the investment disincentive effect of a debt overhang is n ot large enough to place the debtor country on the wrong side of the d ebt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disince ntives or liquidity constraints dominate. It is shown that, except und er very special circumstances, mixed policy packages involving bath de bt and liquidity relief may not yield the desired results. (JEL F34).