This paper investigates the economic and social consequences of sovereign default on external debt. We focus on the crises’ impact on real per capita GDP, infant mortality, life expectancy, poverty headcounts, and calorie supply per capita. After methodological exclusions, the sample covers 221 default episodes over 1815-2020. The analysis adopts an eclectic empirical strategy that relies on an augmented synthetic control method and local projections. Our findings suggest that sovereign defaults lead to significant adverse economic outcomes, with defaulting economies falling behind their counterparts by a cumulative 8.5 percent of GDP per capita within three years of default. Moreover, output per capita remains nearly 20 percent below that of non-defaulting peers after a decade. Based on the trajectory of the health, nutrition, and poverty indicators we study, we assess that the social costs of sovereign default are significant, broad-based, and long-lived.
Authors
Juan P. Farah-Yacoub, Clemens M. Graf von Luckner, Carmen M. Reinhart
- Acknowledgements & Disclosure
- We are indebted to Maïa Debs, Manuel Funke, Kathryn Holston, Sebastian Horn, Eduardo Olaberria, Rita Ramalho, Christoph Trebesch and participants of the OECD/TCX Conference 2022 and DebtCon 2023 for valuable comments. We further thank Lama Al Jarallah and Jonathan Liu for excellent research assistance. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the institutions they are affiliated with. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32600
- Published in
- United States of America
Table of Contents
- Introduction 3
- 2. Literature 7
- 3.3 Data used to restrict the pool for synthetic controls 11
- 3.4 Data used as covariates in local projections 12
- 4. Methodology 12
- 5. Findings: Sovereign Default and its Economic and Social Costs 18
- Our default database spans 1800-2020 and covers up to 193 sovereigns by the close of the sample, which yields a total of 221 default episodes on debt owed to private creditors. In the analysis summarized in this section, the number of default episodes... 18
- 5.1 Real per capita GDP 18
- 5.2 Social indicators 24
- Robustness checks 34
- Five percent normalized root-mean-squared prediction error (NRMSE) threshold 34
- Restricting Donor Pool with Debt/GDP 37
- Simulation-based prediction intervals 40
- Local Projections 43
- Kaminsky, Graciela, and Alfredo Pereira (1996). “The Debt Crisis: Lessons of the 1980s for the 1990s,”Journal of Development Economics, Vol. 50 (1) 1-24. 53
- Appendix 1 – Data 56
- Appendix 2 – Additional results 57
