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Do countries default in bad times? The role of alternative detrending techniques

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  • Panizza, Ugo

Abstract

Quantitative models of sovereign debt predict that countries should default during deep recessions. However, empirical research on sovereign debt has found a surprisingly large share of “good times” defaults (i.e., defaults that happen when GDP is above trend). Existing evidence also indicates that, on average, defaults happen when output is close to potential. This paper reassesses the empirical evidence and shows that the detrending technique proposed by Hamilton (2018) yields results that are closer to the predictions of standard quantitative models of sovereign debt.

Suggested Citation

  • Panizza, Ugo, 2025. "Do countries default in bad times? The role of alternative detrending techniques," Economics Letters, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:ecolet:v:246:y:2025:i:c:s0165176524005603
    DOI: 10.1016/j.econlet.2024.112076
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    More about this item

    Keywords

    Sovereign debt; Default; Business cycles;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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