The cost of defaults: the impact of haircuts on economic growth

Silvia Marchesi and Valeria Prato

No 265, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper studies the impact of debt default on economic growth taking into account the depth of a debt restructuring. More specifically, creditors' losses (or haircuts) are used as proxies of the severity of the default episodes. Analyzing 89 defaults in 72 countries over the period 1979-2005, consistently with previous results in this literature, we find that defaults have a negative and significant impact on short-term output growth. Moreover, controlling for the severity of the default through the haircut's size, we find that the severity of the default is indeed correlated with a further contraction in output one year after the default and with a positive increase in output three years after the default. Therefore, the use of a variable which is taken as a proxy of the severity of the default episode allows us to detect a more lasting (and eventually positive) effect of debt default on growth.

Keywords: Haircuts; Output losses; Sovereign defaults (search for similar items in EconPapers)
JEL-codes: F34 G15 H63 (search for similar items in EconPapers)
Pages: 19
Date: 2013-12, Revised 2013-12
New Economics Papers: this item is included in nep-gro
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:265

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