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Do countries default in “bad times”?

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  • Michael Tomz
  • Mark L. J. Wright

Abstract

This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820-2004. We find 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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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-17.

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Date of creation: 2007
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Publication status: Published in Journal of the European Economic Association, v. 5, no.2-3, pp. 352-60 (shorter version).
Handle: RePEc:fip:fedfwp:2007-17

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Keywords: Default (Finance) ; Debt;

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References

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  1. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
  2. Schulze, Max-Stephan, 2000. "Patterns of growth and stagnation in the late nineteenth century Habsburg economy," European Review of Economic History, Cambridge University Press, vol. 4(03), pages 311-340, December.
  3. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
  4. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
  5. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
  6. Greasley, David & Oxley, Les, 2000. "Measuring New Zealand's GDP 1865-1933: A Cointegration-Based Approach," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(3), pages 351-68, September.
  7. 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 Publishing.
  8. repec:fth:baesse:0108 is not listed on IDEAS
  9. Max-Stephan Schulze, 2000. "Patterns of growth and stagnation in the late nineteenth century Habsburg economy," LSE Research Online Documents on Economics 4370, London School of Economics and Political Science, LSE Library.
  10. World Bank, 2005. "World Development Indicators 2005," World Bank Publications, The World Bank, number 12425, February.
  11. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  12. 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.
  13. Mark L. J. Wright & Rohan Pitchford, 2008. "Restructuring the Sovereign Debt Restructuring Mechanism," 2008 Meeting Papers 147, Society for Economic Dynamics.
  14. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
  15. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Banco de Espa�a Working Papers 0108, Banco de Espa�a.
  16. Rankin, Keith, 1992. "New Zealand's Gross National Product: 1859-1939," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 38(1), pages 49-69, March.
  17. Rohan Pitchford & Mark Wright, 2006. "Sovereign debt, default and renegotiation," 2006 Meeting Papers 331, Society for Economic Dynamics.
  18. Yeyati, Eduardo Levy & Panizza, Ugo, 2011. "The elusive costs of sovereign defaults," Journal of Development Economics, Elsevier, vol. 94(1), pages 95-105, January.
  19. World Bank, 2006. "World Development Indicators 2006," World Bank Publications, The World Bank, number 8151, February.
  20. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  21. repec:wbk:wbpubs:12426 is not listed on IDEAS
  22. Yousef, Tarik M, 2002. "Egypt's Growth Performance under Economic Liberalism: A Reassessment with New GDP Estimates, 1886-1945," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(4), pages 561-79, December.
  23. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
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