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Why does sovereign risk differ for domestic and external debt? Evidence from Scandinavia, 1938-1948

  • Waldenström, Daniel

This study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt. The analysis uses new evidence from Danish and Swedish bond markets around World War II, a time when markets went from being fully integrated to fully segmented overnight. By linking the exogenous wartime shocks to changes in default costs on domestic and external debt, it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets. The results suggest that governments can choose strategically on which debt, the domestic or the external, to default on, and that this decision hinges on the relative size of the political default costs.

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File URL: http://www.sciencedirect.com/science/article/B6V9S-4WNB4XG-1/2/68274adbe5a62c9ebb9004e1c00fe3d4
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 3 (April)
Pages: 387-402

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:387-402
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Caroline Rijckeghem & Beatrice Weder, 2009. "Political institutions and debt crises," Public Choice, Springer, vol. 138(3), pages 387-408, March.
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  10. 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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  12. Mitchener, Kris James & Weidenmier, Marc D., 2010. "Supersanctions and sovereign debt repayment," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 19-36, February.
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  16. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  17. Lothian, James R., 2002. "The internationalization of money and finance and the globalization of financial markets," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 699-724, November.
  18. Kris James Mitchener & Marc D. Weidenmier, 2005. "Supersanctions and Sovereign Debt Repayment," NBER Working Papers 11472, National Bureau of Economic Research, Inc.
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