One Reason Countries Pay Their Debts: Renegotiation and International TradeThis 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 over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF 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 eight percent a year and persists for around fifteen years. |
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15 lags Albania binary variable Bulow and Rogoff Bureau of Economic coefficients creditor creditor countries Currency Union Daron Acemoglu debtor decline in bilateral deter default deter future default DIVERT dummy variable dyads economically and statistically Ex-Colonizer-Colony ex-colony exports and imports fifteen fixed effects estimator Fixed GLS Fixed GLS Fixed GLS Guadeloupe Guinea-Bissau hypothesis IMF program inception instrumental variables intercept international trade Island lag length lags of IMF lags of RENEG Landlocked Log Area Log Distance Log GDP p/c Log Real GDP NBER Working Papers negative effect net present value Number of observations pair of countries panel panel data papers in hard Paris Club agreements Paris Club deals presence of arrears random-effects estimates Regional FTA Regressors RENEG RENEG=0 Renegotiation and International renegotiations on trade repayment rescheduled sample sovereign debt renegotiation sovereign default Standard errors statistically significant Table trade credit trade diversion trade finance trade restrictions unity