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Sovereign defaults: Evidence on the importance of government effectiveness

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  • Jean-Marc Fournier
  • Manuel Bétin

Abstract

This paper provides robust empirical evidence that government effectiveness is a key determinant of sovereign defaults. Government effectiveness is measured by a broad-based perception index of the Worldwide Governance Indicators database (WGI) disseminated by the World Bank. Public debt and sovereign default data cover both external and internal government debt. In a systematic and demanding robustness check with any possible sub-sample of a large set of control variables, the effect of government effectiveness is almost always robust. In addition, the effects of the five other main indicators of the WGI database on default risk are also investigated, showing that the rule of law, regulatory quality, control of corruption and voice and accountability are also robustly linked with default risk. Regressions with the mortality of settlers as an instrument indicate a causal effect from government effectiveness to sovereign default.

Suggested Citation

  • Jean-Marc Fournier & Manuel Bétin, 2018. "Sovereign defaults: Evidence on the importance of government effectiveness," OECD Economics Department Working Papers 1494, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1494-en
    DOI: 10.1787/e6eb6668-en
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    3. Adham Jaber, 2022. "Improving the estimates of fiscal space," French Stata Users' Group Meetings 2022 16, Stata Users Group.
    4. Jean-Marc Fournier & Manuel Bétin, 2018. "Limits to government debt sustainability in middle-income countries," OECD Economics Department Working Papers 1493, OECD Publishing.

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    More about this item

    Keywords

    government effectiveness; institutions; public debt; sovereign default;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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