The Cost of Reserves

Eduardo Levy Yeyati and Ugo Panizza

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode, rather than a further decline, seems to mark the beginning of the economic recovery. This suggests that whatever negative effects a default may have on output, they are driven by its anticipation, independently of whether or not the country ultimately decides to validate it.

Pages: 39 pages
Date: 2006-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: The cost of reserves (2008)
Working Paper: The Cost of Reserves (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpbsdt:2006-11

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