Sovereign defaults, business cycles and economic growth in Latin America, 1870-2012

Tjeerd Boonman

No 13010-EEF, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: Sovereign debt crises have regained attention since the recent crises in several European countries. This paper focuses on a particular aspect of the debt crisis literature: the impact of sovereign default on economic growth. Previous research agrees on the negative impact, but not on size and duration. We are particularly interested in the heterogeneity of crisis impacts: Why are some crises deeper and longer than others? And what is the role of business cycles? We analyze four Latin American countries (Argentina, Brazil, Chile and Mexico) for the period 1870-2012, covering 14 sovereign debt defaults. We find that most sovereign defaults start in recessions, and in unfavorable international circumstances. Economic growth is heavily affected in the year of the default and the year after. Then economic growth picks up, but recovery is far from smooth, including periods of recurrent negative growth. We observe strong heterogeneity in the impact, which we attribute to commodity price changes, economic growth and government expenditure in the run-up to the crisis.

Date: 2013
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