by
Eduardo Levy-Yeyati*
Ugo Panizza**
Abstract*
Few would dispute that sovereign defaults entail significant economic costs,
including, most notably, important output losses. However, most of the evidence
supporting this conventional wisdom, based on annual observations, suffers from
serious measurement and identification problems. To address these drawbacks,
we examine the impact of default on growth by looking at quarterly data for
emerging economies. We find that, contrary to what is typically assumed, output
contractions precede defaults. Moreover, we find that the trough of the
contraction coincides with the quarter of default, and that output starts to grow
thereafter, indicating that default episode seems to mark the beginning of the
economic recovery rather than a further decline. This suggests that, whatever
negative effects a default may have on output, those effects result from
anticipation of a default rather than the default itself.
http://www.iadb.org/res/publications/pubfiles/pubWP-581.pdf
* Universidad Torcuato di Tella
and World Bank
** Inter-American Development Bank
Eduardo Levy-Yeyati*
Ugo Panizza**
Abstract*
Few would dispute that sovereign defaults entail significant economic costs,
including, most notably, important output losses. However, most of the evidence
supporting this conventional wisdom, based on annual observations, suffers from
serious measurement and identification problems. To address these drawbacks,
we examine the impact of default on growth by looking at quarterly data for
emerging economies. We find that, contrary to what is typically assumed, output
contractions precede defaults. Moreover, we find that the trough of the
contraction coincides with the quarter of default, and that output starts to grow
thereafter, indicating that default episode seems to mark the beginning of the
economic recovery rather than a further decline. This suggests that, whatever
negative effects a default may have on output, those effects result from
anticipation of a default rather than the default itself.
http://www.iadb.org/res/publications/pubfiles/pubWP-581.pdf
* Universidad Torcuato di Tella
and World Bank
** Inter-American Development Bank
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