One reason countries pay their debts: renegotiation and international trade |
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| Institution: | 1. Regional Economic Research Staff, Ancona Branch, Banca d''Italia, Piazza Kennedy, 9 - 60122 Ancona, Italy;2. Central Bank Operations Department, Public Debt Division, Banca d''Italia, Via Nazionale 91 - 00184 Rome, Italy;1. Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea;2. Department of Economics, Suffolk University, Boston, MA, United States;3. Research Department, International Monetary Fund, United States |
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| Abstract: | I estimate the effect of sovereign debt renegotiation on international trade. Sovereigns may fear the trade consequences of default; because creditors deter default, or because trade finance dries up. I use an empirical gravity model of trade and a panel data set covering 50 years, over 150 countries, and other factors that influence bilateral trade. Debt 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% a year and persists for around 15 years. |
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