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The elusive costs of sovereign defaults

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  • Yeyati, Eduardo Levy
  • Panizza, Ugo

Abstract

The evidence supporting the presence of output losses associated with sovereign defaults is based on annual observations and suffers from measurement and identification problems. This paper examines the impact of default on growth using quarterly data and finds that output contractions precede defaults and that output starts growing after the quarter in which the default took place. This indicates that default episodes mark the beginning of the economic recovery and that the negative effects of a default on output are likely to be driven by the anticipation of default, independently of whether or not the country ultimately decides to validate it.

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Bibliographic Info

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

Volume (Year): 94 (2011)
Issue (Month): 1 (January)
Pages: 95-105

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Handle: RePEc:eee:deveco:v:94:y:2011:i:1:p:95-105

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Sovereign debt Default Country risk Growth;

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References

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  2. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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  6. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  7. Martinez, Jose Vicente & Sandleris, Guido, 2011. "Is it punishment? Sovereign defaults and the decline in trade," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 909-930, October.
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  17. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, vol. 65(2), pages 297-314, March.
  18. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
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  20. Eduardo Levy Yeyati, 2006. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Business School Working Papers 2006-12, Universidad Torcuato Di Tella.
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  24. Sergio Pernice & Federico Sturzenegger, 2004. "Culture and social resistance to reform: a theory about the endogeneity of public beliefs with an application to the case of Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 275, Universidad del CEMA.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. ¿Cuánto le cuesta el default a Argentina?
    by ELY in Blog de Eduardo Levy Yeyati on 2011-12-06 14:28:00
  2. Boden 15 vs. Boden griego
    by ELY in Blog de Eduardo Levy Yeyati on 2010-04-27 22:43:00
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