Sovereign Debt and International Trade

Charles Serfaty

Working papers from Banque de France

Abstract: Evidence suggests that sovereign defaults disrupt international trade. As a consequence, countries that are more open have more to lose from a sovereign default and are less inclined to renege on their debt. In turn, lenders should trust more open countries and charge them with lower interest rate. In most cases, the country should also borrow more debt as it gets more open. This paper formalizes this idea in a sovereign debt model la Eaton and Gersovitz (1981), proves these theoretical relations, and quantifies them in a calibrating model. We also provide evidence suggesting a causal relationship between trade and debt or CDS spreads, using gravitational instrumental variables from Frankel and Romer (1999) and Feyrer (2019) as a source for exogenous variation in trade openness.

Keywords: Sovereign Debt; International Trade and Finance; Economic Integration (search for similar items in EconPapers)
JEL-codes: B17 F15 H63 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-int and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:901

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