A Debt Overhang Model for Low-Income Countries

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Abstract: This paper presents a theoretical model to explain how debt overhang is generated in low-income countries and discusses its implications for aid design and debt relief. It finds that the extent of debt overhang and the effectiveness of debt relief depend on a recipient country’s initial economic conditions and level of total factor productivity. [JEL E21, F34, F35, F43, O16, O21]