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One reason countries pay their debts: renegotiation and international trade

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  • Rose, Andrew K.

Abstract

This paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and more than 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of International Monetary Fund programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately 8 percent a year and persists for about fifteen years.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 77 (2005)
Issue (Month): 1 (June)
Pages: 189-206

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Handle: RePEc:eee:deveco:v:77:y:2005:i:1:p:189-206

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  1. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
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  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
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