The Cost of Defaults: The Impact of Haircuts on Economic Growth

19 Pages Posted: 2 Jan 2014

See all articles by Silvia Marchesi

Silvia Marchesi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); University of Milan - Centro Studi Luca d'Agliano (LdA)

Valeria Prato

Università degli Studi di Milano-Bicocca

Date Written: December 31, 2013

Abstract

This paper studies the impact of debt default on economic growth taking into account the depth of a debt restructuring. More specifi…cally, creditors’ losses (or haircuts) are used as proxies of the severity of the default episoded. Analyzing 89 defaults in 72 countries over the period 1979-2005, consistently with previous results in this literature, we fi…nd that defaults have a negative and signifi…cant impact on short-term output growth. Moreover, controlling for the severity of the default through the haircut’s size, we fi…nd that the severity of the default is indeed correlated with a further contraction in output one year after the default and with a positive increase in output three years after the default. Therefore, the use of a variable which is taken as a proxy of the severity of the default episode allows us to detect a more lasting (and eventually positive) effect of debt default on growth.

Keywords: Haircuts, Output losses, Sovereign defaults

JEL Classification: F34, G15, H63

Suggested Citation

Marchesi, Silvia and Prato, Valeria, The Cost of Defaults: The Impact of Haircuts on Economic Growth (December 31, 2013). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 265, Available at SSRN: https://ssrn.com/abstract=2373545 or http://dx.doi.org/10.2139/ssrn.2373545

Silvia Marchesi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

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Milano, 20126
Italy
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HOME PAGE: http://https://sites.google.com/site/ssilviamarchesi/home

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

University of Milan - Centro Studi Luca d'Agliano (LdA)

Via P. Amedeo 34
Milano, Mi 20122
Italy

Valeria Prato

Università degli Studi di Milano-Bicocca ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, Milan 20126
Italy

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