deflationHistorically, a Jubilee has been used periodically to cancel personal debts; it has been suggested that these are useful in avoiding a debt-deflation spiral. Are there modern (since 1900, say) examples of this being done on a large scale, and if so, what were the results?
Large scale debt relief (in a particular sector of an economy) is a common occurrence in the agricultural sector in India. This paper by Martin Kanz (in case you can’t access the link, the paper is called “What does Debt Relief do for Development? Evidence from a Large-Scale Policy Experiment”) which I saw presented recently provides some evidence that debt relief unfortunately does not solve the problem of debt overhang.
I wonder, however, to what extent the lack of impact is due to the periodic (rather than one-time) nature of the debt relief: it will work only when it’s unexpected.
Note also that the primary motive of debt relief in the dataset Kanz uses is not the reduction of debt overhang, but the prevention of farmer suicides due to extreme indebtedness. If debt relief is provided with the aim of reducing debt overhang and accompanied by some administrative will it could have very different consequences (I’m an optimist!)
PS: Kanz’s paper was also featured here, which is a great source for keeping track of recent interesting findings in development economics.
All content is licensed under CC BY-SA 3.0.