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The output costs of hard and soft sovereign default

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  • Trebesch, Christoph
  • Zabel, Michael

Abstract

How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the severity of default and not only for its occurrence. Specifically, we distinguish between "hard" and "soft" defaults, using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors. We show that hard defaults are associated with a much steeper drop in GDP, of up to ten percent, compared to soft defaults. The results are consistent with theoretical models assuming proportional output costs of default.

Suggested Citation

  • Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," Munich Reprints in Economics 55046, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:55046
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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G01 - Financial Economics - - General - - - Financial Crises

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