One Reason Countries Pay Their Debts: Renegotiation and International Trade

FRB of New York Staff Report No. 142

HKIMR Working Paper No. 4/2002

37 Pages Posted: 1 Aug 2006

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)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2001

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 more than 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of International Monetary Fund 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 8 percent a year and persists for about fifteen years.

Keywords: empirical, sovereign, default, bilateral, gravity, rescheduling

JEL Classification: F10, F34

Suggested Citation

Rose, Andrew Kenan, One Reason Countries Pay Their Debts: Renegotiation and International Trade (December 2001). FRB of New York Staff Report No. 142; HKIMR Working Paper No. 4/2002. Available at SSRN: https://ssrn.com/abstract=921383 or http://dx.doi.org/10.2139/ssrn.921383

Andrew Kenan Rose (Contact Author)

University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
510-642-6609 (Phone)
510-642-4700 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/arose

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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