Do Countries Default in "Bad Times" ?

Michael Tomz and Mark Wright

Journal of the European Economic Association, 2007, vol. 5, issue 2-3, 352-360

Abstract: This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820--2004. We find a negative but surprisingly weak relationship between economic output in the borrowing country and default on loans from private foreign creditors. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also suspended payments when the domestic economy was favorable, and they have maintained debt service in the face of adverse shocks. This constitutes a puzzle for standard theories of international debt, which predict a much tighter negative relationship as default provides partial insurance against declines in output. (JEL: F21, F34, F41) (c) 2007 by the European Economic Association.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:5:y:2007:i:2-3:p:352-360

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