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Do Countries Default In "Bad Times"?

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Author Info
Michael Tomz
Mark L. J. Wright

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Abstract

This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820-2004. We fi?nd a negative but surprisingly weak relationship between output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

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File URL: http://cama.anu.edu.au/Working%20Papers/Papers/2007/Tomz_Wright_232007.pdf
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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2007-23.

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Length: 52 pages
Date of creation: May 2007
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Handle: RePEc:acb:camaaa:2007-23

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Vivian Z. Yue, 2005. "Sovereign Default and Debt Renegotiation," 2005 Meeting Papers 138, Society for Economic Dynamics. [Downloadable!]
  2. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June. [Downloadable!] (restricted)
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  3. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  4. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
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  5. Don Harding & Adrian Pagan, 1999. "Dissecting the Cycle," Melbourne Institute Working Paper Series wp1999n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  6. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany. [Downloadable!]
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  7. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Banco de España Working Papers 0108, Banco de España. [Downloadable!]
  8. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD, Economics Department. [Downloadable!]
  9. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
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  10. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Banco de España Working Papers 0108, Banco de España. [Downloadable!]
  11. Ugo Panizza & Eduardo Levy Yeyati, 2006. "The Elusive Costs of Sovereign Defaults," RES Working Papers 4485, Inter-American Development Bank, Research Department. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cristina Arellano & Narayana R. Kocherlakota, 2008. "Internal Debt Crises and Sovereign Defaults," NBER Working Papers 13794, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Enrique G. Mendoza & Vivian Z. Yue, 2008. "A Solution to the Default Risk-Business Cycle Disconnect," NBER Working Papers 13861, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Enrique G. Mandoza & Vivian Z. Yue, 2008. "A solution to the default risk-business cycle disconnect," International Finance Discussion Papers 924, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond. [Downloadable!]
  5. Dhillon, Amrita & Sjostrom, Tomas, 2009. "Leader Reputation and Default in Sovereign Debt," The Warwick Economics Research Paper Series (TWERPS) 886, University of Warwick, Department of Economics. [Downloadable!]
  6. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "The economics of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 163-187. [Downloadable!]
  7. Michael Tomz & Mark L. J. Wright, 2008. "Sovereign Theft: Theory And Evidence About Sovereign Default And Expropriation," CAMA Working Papers 2008-07, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  8. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper 07-01, Federal Reserve Bank of Richmond. [Downloadable!]
  9. Bernardo Guimaraes, 2008. "Optimal External Debt and Default," CEP Discussion Papers dp0847, Centre for Economic Performance, LSE. [Downloadable!]
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  10. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies: How Much is thePrivate Sector Affected?," IMF Working Papers 09/29, International Monetary Fund. [Downloadable!]
  11. Dirk Niepelt, 2008. "Debt Maturity without Commitment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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