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The aftermath of sovereign debt crises: a narrative approach

Lennard, Jason ORCID: 0000-0002-6700-8969, Kenny, Seán and Esteves, Rui (2021) The aftermath of sovereign debt crises: a narrative approach. Department of Economic History Working Papers 2021, 344. Department of Economic History, London School of Economics and Political Science, Lonjdon, UK.

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Abstract

Default is as old as sovereign debt. Since 1820, sovereigns have spent 18% of time in a state of default. Despite the scale of the problem, the causes and consequences of defaults are still imperfectly understood. In this paper we quantify the aggregate cost of defaults, based on a sample of 50 sovereigns between 1870 and 2010. Since defaults are endogenous to the business cycle, we use the narrative approach to identify plausibly exogenous episodes. We find significant and persistent costs of defaults starting at 1.6% of GDP and peaking at 3.3% before recovering to the pre-crisis level after five years. Moreover, we identify a large heterogeneity of costs by the cause of default. Higher costs are associated with defaults initiated by negative supply shocks, political crises, or adverse terms of trade. In contrast, domestic demand shocks have a moderate effect that is quickly reversed.

Item Type: Monograph (Working Paper)
Official URL: https://www.lse.ac.uk/Economic-History/Working-Pap...
Additional Information: © 2021 The Authors
Divisions: LSE
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HJ Public Finance
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N10 - General, International, or Comparative
N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative
Date Deposited: 03 Dec 2021 12:24
Last Modified: 03 Dec 2021 12:45
URI: http://eprints.lse.ac.uk/id/eprint/112784

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