Do Countries Default in Bad Times? The Role of Alternative Detrending Techniques

Ugo Panizza

No 06-2022, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: Quantitative models of sovereign debt predict that countries should default during deep recessions. However, empirical research on sovereign debt has found a surprisingly large share of "good times" defaults (i.e., defaults that happen when GDP is above trend). Existing evidence also indicates that, on average, defaults happen when output is close to potential. This paper reassesses the empirical evidence and shows that the detrending technique proposed by Hamilton (2018) yields results that are closer to the predictions of standard quantitative models of sovereign debt.

Keywords: Sovereign Debt; Default; Business Cycles (search for similar items in EconPapers)
JEL-codes: F32 F34 H63 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2022-04-10
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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Working Paper: Do Countries Default in Bad Times? The Role of Alternative Detrending Techniques (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heidwp06-2022

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