Work

Do Countries Default in “Bad times”?

Year: 2007

Type: article

Abstract: This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820–2004. We find a negative but surprisingly weak relationship between economic output in the borrowing country and default on loans from private foreign creditors. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also suspended payments when the domestic economy was favorable, and they have maintained debt service in the face of adverse shocks. This constitutes a puzzle for standard theories of international debt, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

Source: Journal of the European Economic Association

DOI: 10.1162/jeea.2007.5.2-3.352

Authors: Michael Tomz, Mark L. J. Wright

Institutions: Stanford University, Federal Reserve Bank of Minneapolis, University of California, Los Angeles

Language: English

Topic: Global Financial Crisis and Policies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: Stanford Bio-X

OpenAlex ID: W1972020967