One Reason Countries Pay Their Debts: Renegotiation and International Trade

40 Pages Posted: 23 Mar 2002 Last revised: 27 Oct 2010

See all articles by Andrew Kenan Rose

Andrew Kenan Rose

University of California - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); NUS Business School

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Date Written: March 2002

Abstract

This paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately eight percent a year and persists for around fifteen years.

Suggested Citation

Rose, Andrew Kenan, One Reason Countries Pay Their Debts: Renegotiation and International Trade (March 2002). NBER Working Paper No. w8853. Available at SSRN: https://ssrn.com/abstract=305079

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