Working Paper: CEPR ID: DP17216
Authors: Ugo Panizza
Abstract: Quantitative models of sovereign debt predict that countries should default during deep recessions. However, empirical research on sovereign debt has found a surprisingly large share of \good times" defaults (i.e., defaults that happen when GDP is above trend). Existing evidence also indicates that, on average, defaults happen when output is close to potential. This paper reassesses the empirical evidence and shows that the detrending technique proposed by Hamilton (2018) yields results that are closer to the predictions of standard quantitative models of sovereign debt.
Keywords: sovereign debt; default; business cycles
JEL Codes: F34; F32; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic conditions (E66) | sovereign defaults (F34) |
| detrending method (Hamilton 2018) (C22) | timing of defaults (C41) |
| timing of defaults (C41) | economic cycles (E32) |
| output gap (E23) | defaults (Y60) |
| detrending technique (C22) | interpretation of data (Y10) |