Sovereigns going bust: estimating the cost of default

Dmitry Kuvshinov and Kaspar Zimmermann

No 01/2016, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: This paper estimates the cost of sovereign default by using novel econometric methods – dynamic local projections applied to a sample that is re-randomised using inverse propensity score weights. We find that the impact of default on output is negative, significant and persistent – around 2.8% of GDP on impact and 4.8% at peak. The downturn is driven by sharp falls in investment, accompanied by a collapse in gross trade. The cost rises dramatically if the default is followed by a systemic banking crisis, peaking at 9.5% GDP. Our findings suggest that while autarky costs play an important role, sovereign-banking spillovers are central to the cost of default.

Keywords: Sovereign default; sovereign debt; banking crises; treatment effects; local projections; inverse propensity score weighting (search for similar items in EconPapers)
JEL-codes: F34 H63 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:012016

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