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Aid Withdrawal as Punishment for Defaulting Sovereigns? An Empirical Analysis

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Author Info

  • Jana Brandt

    ()
    (University of Giessen)

  • Markus Jorra

    ()
    (University of Giessen)

Abstract

This paper empirically investigates whether donor countries punish sovereign defaults by reducing foreign aid ows. Our ndings reject the hypothesis formulated in the theoretical literature that a default leads to a loss of foreign aid for the defaulting country. Creditor countries directly a ected by the default do not reduce their aid disbursements. Hence, foreign aid is not used as a punishment instrument. Neither can it therefore serve as an enforcement mechanism for international debt contracts. Furthermore, other donors even raise the amount of development assistance allocated to the delinquent country by about 15% on average. Overall the amount of foreign aid given to the defaulting country increases by 6.4%.

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File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/20-2012_brandt.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201220.

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Length: 38 pages
Date of creation: 2012
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201220

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Keywords: Sovereign defaults; Default costs; Foreign aid; Sanctions;

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References

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Cited by:
  1. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.

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