Working Paper

Selective Sovereign Defaults

Abstract: Governments issue debt both domestically and abroad. This heterogeneity introduces the possibility for governments to operate selective defaults that discriminate across investors. Using a novel dataset on the legal jurisdiction of sovereign defaults that distinguishes between defaults under domestic law and default under foreign law, we show that selectiveness is the norm and that imports, credit, and output dynamics are different around different types of default. Domestic defaults are associated with contractions of credit and are more likely in countries with smaller credit markets. In turn, external defaults, are associated with a sharp contraction of imports and are more likely in countries with depressed import markets. Based on these regularities, we construct a dynamic stochastic general equilibrium model that we calibrate to Argentina. We show that the model replicates well the behavior of the Argentinean economy and rationalizes these empirical findings.

Keywords: Sovereign Default; Selective Defaults; Domestic Debt; External Debt; Credit; Imports;

JEL Classification: F34; F41; H63;

https://doi.org/10.17016/IFDP.2018.1239

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2018-11

Number: 1239

Pages: 46 pages