The cost of defaults: the impact of haircuts on economic growth
This paper studies the impact of debt default on economic growth taking into account the depth of a debt restructuring. More specifically, creditors' losses (or haircuts) are used as proxies of the severity of the default episodes. Analyzing 89 defaults in 72 countries over the period 1979-2005, consistently with previous results in this literature, we find that defaults have a negative and significant impact on short-term output growth. Moreover, controlling for the severity of the default through the haircut's size, we find that the severity of the default is indeed correlated with a further contraction in output one year after the default and with a positive increase in output three years after the default. Therefore, the use of a variable which is taken as a proxy of the severity of the default episode allows us to detect a more lasting (and eventually positive) effect of debt default on growth.
|Date of creation:||Dec 2013|
|Date of revision:||Dec 2013|
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