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Do countries default in “bad times”?

  • Michael Tomz
  • Mark L. J. Wright

This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820-2004. We find a negative but surprisingly weak relationship between output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

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File URL: http://www.frbsf.org/publications/economics/papers/2007/wp07-17bk.pdf
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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-17.

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Date of creation: 2007
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Publication status: Published in Journal of the European Economic Association, v. 5, no.2-3, pp. 352-60 (shorter version).
Handle: RePEc:fip:fedfwp:2007-17
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