Working Paper: CEPR ID: DP13084
Authors: Markus Eberhardt
Abstract: Why do some sovereigns repay their debts while others default? I empirically study four theories for default (or its avoidance): (i) reputation, (ii) punishment, (iii) domestic politics, and (iv) international spillovers. Running horse races for a large sample of developing and emerging economies (1970-2015) I find that reputation and spillover effects dominate in terms of economic significance; there is less convincing evidence for punishment effects or political factors. In robustness checks I allow for the transmission of each theory strand through macro-fundamentals, account for capital controls, debt relief, and capital flow bonanzas, investigate domestic, private and present-value external debt, and conduct sample splitting exercises (by exchange rate arrangement, political regime, financial development, and time period). Though they provide more refined insights into the differential mechanisms at work, none of these exercises substantially alter the above conclusions.
Keywords: sovereign default; public debt; international capital markets; reputation; punishment; politics; spillovers; early warning system
JEL Codes: F34; F41; G15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputation (D83) | Default Decisions (D79) |
| Higher share of years in default (G33) | Lower propensity to default (G32) |
| Spillover effects from defaults in other countries (F65) | Sovereign's likelihood of defaulting (G33) |
| Higher counts of defaults elsewhere (F65) | Increased default propensity (E70) |
| Higher trade costs (F12) | Deterrence from defaulting (G33) |
| Lower membership in trade networks (F19) | Deterrence from defaulting (G33) |
| Political regime type (P16) | Default behavior (C92) |
| Democracies (D72) | Different default patterns compared to autocracies (D72) |