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Sovereign Default and International Trade

Author

Listed:
  • Charles Serfaty

    (Banque de France - Banque de France - Banque de France)

Abstract

Evidence suggests that sovereign defaults disrupt international trade. As a consequence, countries that are more open have more to lose from a sovereign default and are less inclined to renege on their debt. In turn, lenders should trust more open countries and charge them with lower interest rate. As a consequence of those lower rates, the country should also borrow more debt as it gets more open. This paper formalizes this idea in a sovereign debt model á la (Eaton and Gersovitz in Rev Econ Stud 48(2):289–309, 1981), proves these theoretical relations and quantifies them in a calibrated model. This paper also provides evidence suggesting a causal relationship between trade and debt, using gravitational instrumental variables from Feyrer (Am Econ J Appl Econ 11(4):1–35, 2019) as a source for exogenous variation in trade openness. The results suggest that, when imports-to-GDP ratio increases by 1%, debt-to-GDP ratio also increases by 1%, and default risks do not increase. These last results are consistent with the quantitative results from the calibrated model.

Suggested Citation

  • Charles Serfaty, 2024. "Sovereign Default and International Trade," Post-Print halshs-04948381, HAL.
    • Handle: RePEc:hal:journl:halshs-04948381
    DOI: 10.1057/s41308-023-00230-x
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    Cited by:

    1. Adamu Braimah Abille & Maria Siranova, 2025. "Capital flight and sovereign bond spreads in Africa: implications for public debt sustainability," Economic Change and Restructuring, Springer, vol. 58(4), pages 1-39, August.
    2. Mohamed M. Sraieb & Shahnawaz Muhammed & Vladimir Dženopoljac & Samet Gunay, 2025. "Determinants of Russia’s probability of default: evidence from domestic and global indicators," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(3), pages 854-882, September.

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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