The aftermath of sovereign debt crises: a narrative approach

Jason Lennard, Seán Kenny and Rui Esteves

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Default is as old as sovereign debt. Since 1820, sovereigns 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 sample of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous episodes. We find significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before recovering to the pre-crisis level after five years. 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 that is quickly reversed.

JEL-codes: E32 F41 H63 N10 N20 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://eprints.lse.ac.uk/112784/ Open access version. (application/pdf)

Related works:
Working Paper: The Aftermath of Sovereign Debt Crises: A Narrative Approach (2021)
Working Paper: The Aftermath of Sovereign Debt Crises: A Narrative Approach (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:112784

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