One reason countries pay their debts: renegotiation and international trade

Abstract: 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.

Keywords: bilateral; Paris Club; empirical; gravity; rescheduling; sovereign; default; panel;

JEL Classification: F10; F34;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2001-12-01

Number: 142

Pages: 37 pages

Note: 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.