Template-Type: ReDIF-Paper 1.0
Title: Sovereigns going bust: estimating the cost of default
Author-Name: Dmitry Kuvshinov
Author-Email: dmitry.kuvshinov@uni-bonn.de
Author-Name: Kaspar Zimmermann
Author-Email: kaspar.zimmermann@uni-bonn.de
Classification-JEL: H63, F34
Keywords: Sovereign default; sovereign debt; banking crises; treatment effects;local projections; inverse propensity score weighting

Abstract: This paper estimates the cost of sovereign default by using novel econometric methods
– dynamic local projections applied to a sample that is re-randomised using inverse
propensity score weights. We find that the impact of default on output is negative, significant
and persistent – around 2.8% of GDP on impact and 4.8% at peak. The downturn
is driven by sharp falls in investment, accompanied by a collapse in gross trade. The
cost rises dramatically if the default is followed by a systemic banking crisis, peaking
at 9.5% GDP. Our findings suggest that while autarky costs play an important role,
sovereign-banking spillovers are central to the cost of default.

Note: 
Length: 49
Creation-Date: 2016-05
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse01_2016.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse01_2016