Working Paper: CEPR ID: DP9303
Authors: Rui Esteves; Joo Tovar Jalles
Abstract: This paper investigates the impact of sovereign defaults on the ability of the corporate sector in emerging nations to finance itself abroad. The hypothesis here is that defaults have a negative spillover effect on the private sector through credit rationing. We explore a novel dataset covering the vast majority of corporates and municipals in emerging nations that received foreign capital between 1880 and 1913. The detailed nature of the data allows us to explore variation between countries and economic sectors. The results confirm that rationing existed, was very large, and persisted long beyond the solution of the original default problem. Therefore, the private sector in emerging countries paid a severe reputational cost for the debt intolerance of their governments, with possible implications for the growth prospects of these nations.
Keywords: Credit Rationing; Foreign Investment; Pre-1914; Sovereign Default
JEL Codes: F32; F34; H63; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign defaults (F34) | Private capital inflows (F21) |
| Duration of defaults (C41) | Drop in capital inflows (F32) |
| Sovereign defaults (F34) | Credit rationing (G21) |
| Sovereign defaults (F34) | Long-term growth implications (D25) |