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The stock market appreciates by an average of 60 percent in real dollar terms when countries announce debt relief agreements under the Brady Plan. In contrast, there is no significant increase in market value for a control group of countries that do not sign agreements. The results persist after controlling for IMF agreements, trade liberalizations, capital account liberalizations, and privatization programs. The stock market revaluations forecast higher future net resource transfers and GDP growth. This paper argues that while markets respond favorably to debt relief in the Brady countries, there is no evidence to suggest that current debt relief efforts for highly indebted poor countries will achieve similar results.
Journal of Economic Perspectives; Winter 2006, Vol. 20 Issue 1 pp. 207-220
Stanford Graduate School of Business Working Paper #1810