We argue that the disincentive effect of a debt overhang is generally small and consequently that debt reduction does not lead to important efficiency gains on this account. Instead, we develop a framework that highlights the inefficiency created by the liquidity constraint faced by...

This paper analyzes some of the implications of the dual transfer a debtor nation must undertake to service foreign debt: (a) an internal transfer from the private sector to the public sector; and (b) an external transfer from the domestic economy to foreign creditors. It shows that, under...