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One Reason Countries Pay Their Debts: Renegotiation and International Trade

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  • Andrew K. Rose

    (University of California, Berkeley)

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 over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF 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 eight per cent a year and persists for around fifteen years.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 042002.

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Length: 31 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:hkm:wpaper:042002

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Related research

Keywords: empirical; sovereign; default; bilateral; panel; gravity; Paris Club; rescheduling;

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References

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  1. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  13. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and the World Economy, pages 225-236 National Bureau of Economic Research, Inc.
    • Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
  14. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  15. E. Maskin & D. Fudenberg, 1984. "The Folk Theorem and Repeated Games with Discount and with Incomplete Information," Working papers 310, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Gary Clyde Hufbauer, 1998. "Sanctions-Happy USA," Policy Briefs PB98-4, Peterson Institute for International Economics.
  17. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
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