Abstract

This paper advances the hypothesis that the world debt crisis was mainly induced by the dramatic rise of US interest rates in the first half of the eighties. lt sees this rise in interest rates primarily as a result of a light US monetary policy and excessively large investment incentives provided by the 1981 US tax reform. A welfare analysis shows that the policies could have increased the US advantage from lending its capital abroad, bad they been more moderately designed. The actual policies, however, were by far too strong to produce this result.