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Is it Punishment? Sovereign Defaults and the Decline in Trade

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

Abstract

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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File URL: http://www.utdt.edu/download.php?fname=_120457696643806400.pdf
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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
Handle: RePEc:udt:wpbsdt:2008-01
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Web page: http://www.utdt.edu/listado_contenidos.php?id_item_menu=4994

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  1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  2. 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.
  3. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
  4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
  5. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
  6. 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.
  7. 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.
  8. Sandleris, Guido, 2008. "Sovereign defaults: Information, investment and credit," Journal of International Economics, Elsevier, vol. 76(2), pages 267-275, December.
  9. Bulow, J. & Rogof, K., 1989. "Sovereign Debt Repurchases: No Cure For Overhang," Working papers 8903, Wisconsin Madison - Social Systems.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-620, June.
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