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The Aftermath of Sovereign Debt Crises: A Narrative Approach

Rui Esteves, Seán Kenny () and Jason Lennard ()
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Seán Kenny: Department of Economic History, Lund University, Postal: Department of Economic History, Lund University, Box 7083, S-220 07 Lund, Sweden

No 221, Lund Papers in Economic History from Lund University, Department of Economic History

Abstract: Default is as old as sovereign debt. Since 1820, countries that issued sovereign debt 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 costof defaults, based on a large panel of 50 sovereigns between 1870and 2010. Since defaults are endogenousto the business cycle, we use the narrative approach to identify plausibly exogenous debt crises. Our estimatesyield significant and persistent costsof defaults starting at 1.6% of GDP and peaking at3.3% before reverting to trend five years after a debt event. Moreover, weidentify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated bynegative supply shocks, political crises,or adverse terms of trade. In contrast, domestic demand shocks have a moderate effect, quickly reversed. Despite working with a large sample, we document how average estimates of default costs can be sensitive to different dating and definitions of defaults.

Keywords: Business cycles; narrative approach; sovereign debt crises (search for similar items in EconPapers)
JEL-codes: E32 F34 F41 G01 H63 N10 N20 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2021-05-21
New Economics Papers: this item is included in nep-his, nep-mac and nep-opm
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Related works:
Working Paper: The Aftermath of Sovereign Debt Crises: A Narrative Approach (2021) Downloads
Working Paper: The aftermath of sovereign debt crises: a narrative approach (2021) Downloads
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