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

Author(s): Stijn Claessens, Danel Oks, Sweder van Wijnbergen
Publication Date: February 1994
Keyword(s): Debt Relief, Debt Uncertainty, Investment and Uncertainty, Uncertainty and Economic Growth
JEL(s): F34
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=904

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 variability of the future net transfer is significant, the impact of the net transfer itself is not. Specifically the favourable impact on uncertainty about future exchange rate crises 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.