Working Paper: CEPR ID: DP4683
Authors: Caroline van Rijckeghem; Beatrice Weder
Abstract: This paper shows that politics matter in explaining defaults on external and domestic debt obligations. We explore a large number of political and macroeconomic variables using a nonparametric technique to predict safety from default. The advantage of this technique is that it is able to identify complementarities that are not captured in standard probit analysis. We find that political factors matter, and do so in different ways for democratic and non-democratic regimes, and for domestic and external debt. Moreover we find that there is an important complementarity between political and economic conditions, which is essential in explaining the incidence of default.
Keywords: Early warning systems; Political institutions; Sovereign debt crises
JEL Codes: D27; F30; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political factors (P16) | defaults on external and domestic debt (F34) |
| strong liquidity or favorable economic fundamentals (E44) | political institutions prevent defaults (D02) |
| political institutions prevent defaults (D02) | lower default rates (E43) |
| timing of political events (D72) | default behavior (C92) |
| longer tenure of chief executive (M12) | safety from default in dictatorships (P26) |
| political stability and economic conditions (E66) | lower default rates (E43) |