The Transfer Problem in Small Open Economies: Exchange Rate and Fiscal Policies for Debt Service
Since the onset of the debt crisis in 1982, the requirement of prompt debt service has overwhelmed many other traditional objectives of government policy in highly-indebted countries. The virtual halt in commercial bank lending has reversed the sign of net resource inflows to these countries, necessitating the transfer abroad of several percentage points of GDP annually. A reverse transfer of such magnitude has required a retrenchment in domestic expenditures and sharp changes in relative prices, which have proved particularly costly in terms of capital formation and (it would appear) income distribution(1).
KeywordsReal Exchange Rate Debt Service Foreign Debt Export Subsidy Capital Flight
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