Journal Article

When Is External Debt Sustainable?

Aart Kraay and Vikram Nehru

in The World Bank Economic Review

Volume 20, issue 3, pages 341-365
Published in print October 2006 | ISSN: 0258-6770
Published online August 2006 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lhl006
When Is External Debt Sustainable?

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The article empirically examines the determinants of debt distress, defined as periods in which countries resort to any of three forms of exceptional finance: significant arrears on external debt, Paris Club rescheduling, and nonconcessional International Monetary Fund lending. Probit regressions show that three factors explain a substantial fraction of the cross-country and time-series variation in the incidence of debt distress: the debt burden, the quality of policies and institutions, and shocks. The relative importance of these factors varies with the level of development. These results are robust to a variety of alternative specifications, and the core specifications have substantial out-of-sample predictive power. The quantitative implications of these results are examined for the lending strategies of official creditors.

Journal Article.  10335 words.  Illustrated.

Subjects: Development Planning and Policy

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