One Reason Countries Pay Their Debts: Renegotiation and International Trade

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One Reason Countries Pay Their Debts: Renegotiation and International Trade

December 2001 Number 142

JEL classification: F10, F34

Author: Andrew K. Rose

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 more than 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of International Monetary Fund 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 8 percent a year and persists for about fifteen years.

Available only in PDF PDF

37 pages / 218 kb

For a published version of this report, see Andrew K. Rose, "One Reason Countries Pay Their Debts: Renegotiation and International Trade," Journal of Development Economics 77, no. 1 (June 2005): 189-206.

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