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The Aftermath of Sovereign Debt Crises: A Narrative Approach

Esteves, Rui ; Kenny, Seán LU and Lennard, Jason LU (2021) In Lund Papers in Economic History
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 cost of defaults, based on a large panel of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous debt crises. Our estimates yield significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before reverting to trend five years after a debt event. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs... (More)
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 cost of defaults, based on a large panel of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous debt crises. Our estimates yield significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before reverting to trend five years after a debt event. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated by negative 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.
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author
; and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Business cycles, narrative approach, sovereign debt crises, E32, F34, F41, G01, H63, N10, N20
in
Lund Papers in Economic History
issue
2021:221
pages
80 pages
language
English
LU publication?
yes
id
a246d54b-2ee0-45c9-93ea-502225642026
date added to LUP
2021-05-21 10:00:56
date last changed
2021-05-21 10:09:32
@misc{a246d54b-2ee0-45c9-93ea-502225642026,
  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 cost of defaults, based on a large panel of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify  plausibly exogenous debt crises. Our estimates yield significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before reverting to trend five years after a debt event. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated by negative 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.  <br/>}},
  author       = {{Esteves, Rui and Kenny, Seán and Lennard, Jason}},
  keywords     = {{Business cycles; narrative approach; sovereign debt crises; E32; F34; F41; G01; H63; N10; N20}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2021:221}},
  series       = {{Lund Papers in Economic History}},
  title        = {{The Aftermath of Sovereign Debt Crises: A Narrative Approach}},
  url          = {{https://lup.lub.lu.se/search/files/98045061/LUPEH_221.pdf}},
  year         = {{2021}},
}