Rui Esteves, Seán Kenny () and Jason Lennard
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Rui Esteves: International Economics and International History Departments, Graduate Institute of International and Development Studies, Geneva
Seán Kenny: Department of Economic History, Lund University, Postal: Department of Economic History, Lund University, Box 7083, S-220 07 Lund, Sweden
Jason Lennard: Department of Economic History, London School of Economics
Abstract: Default is as old as sovereign debt. Since 1820, countries that issued sovereign debt have spent 18% of time in a state of default. Despite the scale of the problem, the causes and consequences of defaults are still imperfectly understood. In this paper we quantify the aggregate costof defaults, based on a large panel of 50 sovereigns between 1870and 2010. Since defaults are endogenousto the business cycle, we use the narrative approach to identify plausibly exogenous debt crises. Our estimatesyield significant and persistent costsof defaults starting at 1.6% of GDP and peaking at3.3% before reverting to trend five years after a debt event. Moreover, weidentify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated bynegative supply shocks, political crises,or adverse terms of trade. In contrast, domestic demand shocks have a moderate effect, quickly reversed. Despite working with a large sample, we document how average estimates of default costs can be sensitive to different dating and definitions of defaults.
Keywords: Business cycles; narrative approach; sovereign debt crises
JEL-codes: E32; F34; F41; G01; H63; N10; N20
77 pages, May 21, 2021
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