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Sovereign defaults, business cycles and economic growth in Latin America, 1870-2012

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  • Boonman, Tjeerd M.

    (Groningen University)

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    Abstract

    Sovereign debt crises have regained attention since the recent crises in several European countries. This paper focuses on a particular aspect of the debt crisis literature: the impact of sovereign default on economic growth. Previous research agrees on the negative impact, but not on size and duration. We are particularly interested in the heterogeneity of crisis impacts: Why are some crises deeper and longer than others? And what is the role of business cycles? We analyze four Latin American countries (Argentina, Brazil, Chile and Mexico) for the period 1870-2012, covering 14 sovereign debt defaults. We find that most sovereign defaults start in recessions, and in unfavorable international circumstances. Economic growth is heavily affected in the year of the default and the year after. Then economic growth picks up, but recovery is far from smooth, including periods of recurrent negative growth. We observe strong heterogeneity in the impact, which we attribute to commodity price changes, economic growth and government expenditure in the run-up to the crisis.

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    File URL: http://irs.ub.rug.nl/ppn/364114401
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    Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 13010-EEF.

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    Date of creation: 2013
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    Handle: RePEc:dgr:rugsom:13010-eef

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
    3. Daniel Kapp & Marco Vega, 2014. "Real output costs of financial crises: A loss distribution approach," Cuadernos de Economía - Spanish Journal of Economics and Finance, ELSEVIER, vol. 37(103), pages 13-28, Abril.
    4. Gerardo della Paolera & Alan M. Taylor, 2012. "Sovereign Debt in Latin America, 1820–1913," CEU Working Papers 2012_18, Department of Economics, Central European University, revised 19 Sep 2012.
    5. Davide Furceri & Aleksandra Zdzienicka, 2011. "How Costly Are Debt Crises?," IMF Working Papers 11/280, International Monetary Fund.
    6. Miguel Fuentes & Diego Saravia, 2006. "Sovereign Defaulters: Do International Capital Markets Punish Them?," Documentos de Trabajo 314, Instituto de Economia. Pontificia Universidad Católica de Chile..
    7. Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2012. "On Graduation from Fiscal Procyclicality," Working Paper Series rwp12-011, Harvard University, John F. Kennedy School of Government.
    8. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, vol. 72(2), pages 428-450, July.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    10. Kapp, Daniel & Vega, Marco, 2012. "Real output costs of financial crises: a loss distribution approach," MPRA Paper 35706, University Library of Munich, Germany.
    11. Markus Bruckner & Rabah Arezki, 2010. "International Commodity Price Shocks, Democracy, and External Debt," IMF Working Papers 10/53, International Monetary Fund.
    12. Bordo, Michael D. & Schwartz, Anna J., 2000. "Measuring real economic effects of bailouts: historical perspectives on how countries in financial distress have fared with and without bailouts," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 81-167, December.
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