One Reason Countries Pay Their Debts: Renegotiation and International Trade

37 Pages Posted: 1 Aug 2006 Last revised: 15 Sep 2022

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2001

Abstract

This working paper was written by Andrew K. Rose (University of California, Berkeley, NBER and CEPR).

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

Institute for Monetary and Financial Research, Hong Kong, One Reason Countries Pay Their Debts: Renegotiation and International Trade (December 1, 2001). FRB of New York Staff Report No. 142, Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 04/2002, Journal of Development Economics, Vol. 77, No. 1, 2005, Available at SSRN: https://ssrn.com/abstract=921383 or http://dx.doi.org/10.2139/ssrn.921383

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

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88 Queensway
Hong Kong
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