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To Default or Not? The Aftermath of Sovereign Defaults and IMF Austerity Programs During Economic Crises

45 Pages Posted: 30 May 2016  

Tuomas Malinen

HECER, University of Helsinki

Olli Tapani Ropponen

Government of the Republic of Finland - Government Institute for Economic Research (VATT); University of Helsinki - Department of Political and Economic Studies

Date Written: May 27, 2016

Abstract

Economic crises are an agonizing feature of modern economies leading to dramatic falls in the real GDP per capita. A crisis can exhaust country's resources forcing it to either apply for an IMF program or to default on its foreign or domestic liabilities. Do these drastic measures aid countries in crisis? In this study, we aim to answer this question using a large dataset on economic crises after the Second World War. Results show that, in terms of the real economy, developing countries should avoid defaults during crises and that domestic default is the most disruptive form of default. The economic outcomes of sovereign defaults are in general unequivocal and depend, e.g., on the level of external debt. IMF programs are found to provide the most lenient crisis outcome.

Keywords: GDP per capita, external debt, public debt, difference-in-differences

JEL Classification: F34, H63, O40

Suggested Citation

Malinen, Tuomas and Ropponen, Olli Tapani, To Default or Not? The Aftermath of Sovereign Defaults and IMF Austerity Programs During Economic Crises (May 27, 2016). Available at SSRN: https://ssrn.com/abstract=2785491 or http://dx.doi.org/10.2139/ssrn.2785491

Tuomas Malinen (Contact Author)

HECER, University of Helsinki ( email )

Helsinki, 00014
Finland

Olli Tapani Ropponen

Government of the Republic of Finland - Government Institute for Economic Research (VATT) ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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