One Reason Countries Pay Their Debts: Renegotiation and International Trade

Andrew Rose

No 42002, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately eight per cent a year and persists for around fifteen years.

Keywords: empirical; sovereign; default; bilateral; panel; gravity; Paris Club; rescheduling (search for similar items in EconPapers)
JEL-codes: F10 F34 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2002-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

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Related works:
Journal Article: One reason countries pay their debts: renegotiation and international trade (2005)
Working Paper: One Reason Countries Pay Their Debts: Renegotiation and International Trade (2002)
Working Paper: One Reason Countries Pay their Debts: Renegotiation and International Trade (2002)
Working Paper: One Reason Countries Pay their Debts: Renegotiation and International Trade (2002)
Working Paper: One reason countries pay their debts: renegotiation and international trade (2001)
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