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Review of World Economics

, Volume 143, Issue 4, pp 764–782 | Cite as

Loans or Grants?

  • Daniel CohenEmail author
  • Pierre Jacquet
  • Helmut Reisen
Article

Abstract

We argue in this paper that canceling the debt of the poorest countries was a good thing, but that it should not imply that the debt instrument should be foregone. Debt and debt cancellations are indeed two complementary instruments which, if properly managed, perform better than either loans or grants taken in isolation. The core of the intuition, which we develop in a simple two-period model, relates to the fact that the poorest countries are also the most volatile, so that contingent facilities, explicitly incorporating debt cancellation mechanisms, are a valuable instrument.

Keywords

Grants loans developing countries 

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Copyright information

© Kiel Institute 2007

Authors and Affiliations

  1. 1.Paris School of EconomicsParisFrance
  2. 2.OECD Development CentreParisFrance
  3. 3.CEPRLondonUnited Kingdom
  4. 4.Agence Francaise de DeveloppementParisFrance

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