Do countries default in “bad times”?

Michael Tomz and Mark Wright

No 2007-17, Working Paper Series from Federal Reserve Bank of San Francisco

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 output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

Keywords: Default (Finance); Debt (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-his and nep-ias
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Citations: View citations in EconPapers (128)

Published in Journal of the European Economic Association, v. 5, no.2-3, pp. 352-60 (shorter version).

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http://www.frbsf.org/publications/economics/papers/2007/wp07-17bk.pdf (application/pdf)

Related works:
Journal Article: Do Countries Default in "Bad Times" ? (2007)
Working Paper: DO COUNTRIES DEFAULT IN "BAD TIMES"? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2007-17

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