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Is it punishment? Sovereign defaults and the decline in trade

Listed author(s):
  • Martinez, Jose Vicente
  • Sandleris, Guido

Sovereign defaults are associated with declines in defaulting countries trade. Are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest? We devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines, bilateral trade with creditor countries should fall more than trade with other countries. We find that this is not the case. The analysis does not yield much evidence of broader punishment strategies including a league of major creditors either. These results contradict the predictions of the trade sanctions theory of sovereign borrowing.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560611000799
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 6 (October)
Pages: 909-930

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:6:p:909-930
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  3. Guido M. Sandleris, 2005. "Sovereign Defaults: Information, Investment and Credit," 2005 Meeting Papers 21, Society for Economic Dynamics.
  4. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  5. Jeremy Bulow & Kenneth Rogoff, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1219-1235.
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  7. Philip Lane, 1998. "North-South Lending with Moral Hazard and Repudiation Risk," Economics Technical Papers 989, Trinity College Dublin, Department of Economics.
  8. Rose, Andrew K & Spiegel, Mark, 2002. "A Gravity Model of International Lending: Trade, Default and Credit," CEPR Discussion Papers 3539, C.E.P.R. Discussion Papers.
  9. Eichengreen, Barry & Portes, Richard, 1985. "Debt and Default in the 1930s: Causes and Consequences," CEPR Discussion Papers 75, C.E.P.R. Discussion Papers.
  10. Bulow, J. & Rogof, K., 1989. "Sovereign Debt Repurchases: No Cure For Overhang," Working papers 8903, Wisconsin Madison - Social Systems.
  11. Rose, Andrew K, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," CEPR Discussion Papers 3157, C.E.P.R. Discussion Papers.
  12. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  13. Raquel Fernandez & Robert W. Rosenthal, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 331-349.
  14. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-620, June.
  15. Harold L. Cole & Patrick J. Kehoe, 1997. "Reviving reputation models of international debt," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 21-30.
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