Working Paper: CEPR ID: DP3157
Authors: Andrew K. Rose
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 over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF 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 eight % a year and persists for around fifteen years.
Keywords: bilateral; club; default; empirical; gravity; panel; paris; rescheduling; sovereign
JEL Codes: F10; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign debt renegotiation (F34) | decline in bilateral trade (F19) |
| Sovereign debt renegotiation (F34) | trade credit reduction (G32) |
| Sovereign debt renegotiation (F34) | creditors' desire to deter future defaults (G33) |
| Sovereign debt renegotiation (F34) | cumulative negative effect on trade (F14) |