The Elusive Costs of Sovereign Defaults

By U. Panizza, E. L. Yeyati. 2006

278 citations recorded by the source corpus.

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 seems to mark the beginning of the economic recovery rather than a further decline. This suggests that, whatever negative effects a default may have on output, those effects result from anticipation of a default rather than the default itself.

Subfields: Economics and Econometrics, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/de979d871e2a923cee3366e14489f2edef088ea0

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Citations in the corpus

Sovereign Risk and Belief-Driven Fluctuations in the Euro Area (2013, unknown): “14 In the current (14)This implication of our setup is in line with evidence reported by Yeyati and Panizza (2011). Investigating output growth across a large number of episodes of sovereign default, they find that the output costs of default”
Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators (2014, background): “While currency crises were the subject of investigation in the pioneering studies, the recent literature has tried to encompass more types of costly events, including various types of banking and debt crises (Laeven and Valencia, 2012; Levy-Yeyati and Panizza, 2011; Reinhart and Rogoff, 2011).”
Financial Crises: Explanations, Types, and Implications (2013, unknown): “Borensztein and Panizza (2009), Levy-Yeyati and Panizza (2011), and Furceri and Zdzienicka (2012) all document that debt crises are associated with substantial GDP losses.”
Government Reputation and Debt Repayment in Emerging Economies (2008, result): “Business cycle moments for emerging economies are well documented and results obtained in this paper are consistent with previous studies.(31) Using data from Argentina, I found that consumption and output are highly correlated (corr(y, c) = 0.”
Empirical Research on Sovereign Debt and Default (2013, background): “Levy Yeyati E, Panizza U. 2011.”
Sovereign Debt Restructurings: Preemptive or Post-Default (2015, background): “We also provide new evidence on the output costs during sovereign debt crises, which have been studied by Sturzenegger (2004), Tomz and Wright (2007), Borensztein and Panizza (2009), De Paoli et al. (2009) and Levy-Yeyati and Panizza (2011).”
A Model of the Twin Ds: Optimal Default and Devaluation (2015, unknown): “Therefore, the model captures the empirical regularity regarding the cyclical behavior of output around default episodes identiﬁed by Levy-Yeyati and Panizza (2011), according to which default marks the end of a contraction and the beginning of a recovery.”
Sovereign Risk, Fiscal Policy, and Macroeconomic Stability (2013, result): “6This implication of our setup is in line with evidence reported by Yeyati and Panizza (2011).”
How Costly are Debt Crises? (2011, background): “Reinhart and Rogoff (2009) estimate that in the three years after the occurrence of a banking crisis the real value of government debt rose on average by 86%.”