The Geoeconomics of International Political Relations and Sovereign Defaults 

45 Pages Posted: 14 Apr 2023 Last revised: 12 Jun 2024

See all articles by Consuelo Silva Buston

Consuelo Silva Buston

Pontificia Universidad Católica de Chile - School of Business

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: March 31, 2024

Abstract

We show that a country's international political stance predicts its sovereign debt default risk by shaping long-term fluctuations in capital inflows. In the aftermath of a default, robust international political relations facilitate smoother recovery for a nation, characterized by less pronounced declines in output and credit, and less steep increases in sovereign bond yields. We introduce a bilateral international political relations (IPR) index for 152 countries from the 1880s onwards, which summarizes a country's military cooperation and diplomatic integration with its peers and is formed by aggregating widely used sources in the political science literature. The IPR index has a robust in-sample and out-of-sample ability to predict sovereign debt crises and can serve as an early warning indicator, offering accurate signals quantitatively similar to better-known crisis predictors, including the debt-to-GDP ratio, inflation, and domestic political stability.

Keywords: Geopolitical risk, crisis predictability, capital flows, international politics, gravity model

JEL Classification: F34, F50, F60, H63, N20

Suggested Citation

Silva Buston, Consuelo and Valenzuela, Marcela and Zer, Ilknur, The Geoeconomics of International Political Relations and Sovereign Defaults  (March 31, 2024). Available at SSRN: https://ssrn.com/abstract=4406255 or http://dx.doi.org/10.2139/ssrn.4406255

Consuelo Silva Buston (Contact Author)

Pontificia Universidad Católica de Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

Marcela Valenzuela

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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