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The Elusive Costs of Sovereign Defaults

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  • Ugo Panizza
  • Eduardo Levy Yeyati

Abstract

Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode seems to mark the beginning of the economic recovery rather than a further decline. This suggests that, whatever negative effects a default may have on output, those effects result from anticipation of a default rather than the default itself.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6713.

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Date of creation: Nov 2006
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Handle: RePEc:idb:brikps:6713

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Keywords: Financial Sector; WP-581;

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  1. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
  2. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," NBER Working Papers 8853, National Bureau of Economic Research, Inc.
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  8. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  9. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
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  15. Eduardo Borensztein & Ugo Panizza, 2006. "Do Sovereign Defaults Hurt Exporters?," IDB Publications 6704, Inter-American Development Bank.
  16. Jose Vicente Martinez and Guido Sandleris, 2008. "Is it Punishment? Sovereign Defaults and the Decline in Trade," Business School Working Papers, Universidad Torcuato Di Tella 2008-01, Universidad Torcuato Di Tella.
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  19. 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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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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