Arbeitspapier

Sovereigns going bust: estimating the cost of default

This paper estimates the cost of sovereign default by using novel econometric methods – dynamic local projections applied to a sample that is re-randomised using inverse propensity score weights. We find that the impact of default on output is negative, significant and persistent – around 2.8% of GDP on impact and 4.8% at peak. The downturn is driven by sharp falls in investment, accompanied by a collapse in gross trade. The cost rises dramatically if the default is followed by a systemic banking crisis, peaking at 9.5% GDP. Our findings suggest that while autarky costs play an important role, sovereign-banking spillovers are central to the cost of default.

Language
Englisch

Bibliographic citation
Series: Bonn Econ Discussion Papers ; No. 01/2016

Classification
Wirtschaft
National Debt; Debt Management; Sovereign Debt
International Lending and Debt Problems
Subject
Sovereign default
sovereign debt
banking crises
treatment effects
local projections
inverse propensity score weighting

Event
Geistige Schöpfung
(who)
Kuvshinov, Dmitry
Zimmermann, Kaspar
Event
Veröffentlichung
(who)
University of Bonn, Bonn Graduate School of Economics (BGSE)
(where)
Bonn
(when)
2016

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Kuvshinov, Dmitry
  • Zimmermann, Kaspar
  • University of Bonn, Bonn Graduate School of Economics (BGSE)

Time of origin

  • 2016

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