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Is it Punishment? Sovereign Defaults and the Decline in Trade

  • Jose Vicente Martinez and Guido Sandleris

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 nd that this is not the case. The analysis does not yield 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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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2008-01.

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Length: 32 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:udt:wpbsdt:2008-01
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  1. Andrew K. Rose, 2001. "One reason countries pay their debts: renegotiation and international trade," Staff Reports 142, Federal Reserve Bank of New York.
  2. Eichengreen, Barry & Portes, Richard, 1986. "Debt and default in the 1930s : Causes and consequences," European Economic Review, Elsevier, vol. 30(3), pages 599-640, June.
  3. Sandleris, Guido, 2008. "Sovereign defaults: Information, investment and credit," Journal of International Economics, Elsevier, vol. 76(2), pages 267-275, December.
  4. Jeremy Bulow & Kenneth Rogoff, 1989. "Sovereign Debt Repurchases: No Cure for Overhang," NBER Working Papers 2850, National Bureau of Economic Research, Inc.
  5. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  6. Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  7. Lane, Philip R, 1999. "North-South Lending with Moral Hazard and Repudiation Risk," Review of International Economics, Wiley Blackwell, vol. 7(1), pages 50-58, February.
  8. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. repec:att:wimass:8903 is not listed on IDEAS
  12. 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.
  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. 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.
  15. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-20, June.
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