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One reason countries pay their debts: renegotiation and international trade

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  • Andrew K. Rose

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.

Suggested Citation

  • Andrew K. Rose, 2001. "One reason countries pay their debts: renegotiation and international trade," Staff Reports 142, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:142
    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.
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    More about this item

    Keywords

    bilateral; Paris Club; empirical; gravity; rescheduling; sovereign; default; panel;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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