Do Countries Default in 'Bad Times'?

FRB of San Francisco Working Paper No. 2007-17

52 Pages Posted: 2 Nov 2007

See all articles by Michael Tomz

Michael Tomz

Stanford University

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: May 2007

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 output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

Keywords: Default, Debt

Suggested Citation

Tomz, Michael and Wright, Mark L.J., Do Countries Default in 'Bad Times'? (May 2007). Available at SSRN: https://ssrn.com/abstract=1026384 or http://dx.doi.org/10.2139/ssrn.1026384

Michael Tomz (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Mark L.J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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